The Supply Chain Response to Environmental Pressures
by
Julie Rebecca Paquette
ScB, Chemical Engineering
Brown University, 1999
Submitted to the Engineering Systems Division and the
Department of Civil and Environmental Engineering
in partial fulfillment of the requirements for the degrees of
Master of Science in Technology and Policy
and
Master of Science in Civil & Environmental Engineering
at the
Massachusetts Institute of Technology
February 2006
©2006 Massachusetts Institute of Technology. All rights reserved.
Signatureof Author...
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Engineering SysterrkDiviond
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the Department of Civil & Environmental Engineering
>September6, 2005
Certifiedby...........................................................................
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Certifiedby........
of Engineeringstems
ofessor
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Rand h E. Kirchain, Jr.
and MaterialsScience & Engineering
ThesisSupervisor
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............ .......................
David H. Marks
Professor of Engineering Systems and Civil & Environmental Engineering
Director, Laboratory for Enyrgy the Environment
Accepted by..............................................................................
Professor of Civil & Environmental Engineering
Cdheman, De:artmental Committee for Graduate Students
Accepted
by............................... .. .................................................................
/ ......
Dava J. Newman
Professor of Enginee ng Systems and Aeronautics & Astronautics
Director, Technology & Policy Program
ARCHIVES
The Supply Chain Response to Environmental Pressures
by
Julie Rebecca Paquette
Submitted to the
Engineering Systems Division and the
Department of Civil & Environmental Engineering
on September 6, 2005, in
partial fulfillment of the requirementsfor the degrees of
Master of Science in Technology and Policy and
Master of Science in Civil & Environmental Engineering.
Abstract
Understanding and shaping the relationship between supply chain management and the natural
environment is critical not only to human health and the environment, but to the future success of
business. While the cumulative environmental impacts of industrial production are best addressed
at the supply chain level, little research has connected the overall context of supply chain
management, including the characteristics of environmental pressures and market drivers, to a
general approach for developing operational supply chain processes that may deliver
environmental and economic performance improvements.
Findings from a series of semi-structured interviews indicate that there are four sources of
environmental pressure currently affecting supply chain management in unique ways. These
include regulations, customer demands, resources, and ethical responsibility. Corporations that
are better able to identify and understand these impacts will be better positioned to address them
strategically.
A framework of supply chain environmental excellence is presented to illustrate how corporations
may integrate environmental operating models, operational objectives, and new supply chain
processes into a comprehensive corporate strategy.
A case study of the emergence of reverse supply chains within the electronics industry illustrates
why supply chain processes should be developed in a context defined by environmental
pressures and market drivers. As the electronics industry is faced with environmental pressure
from evolving regulatory directives, liability concerns, and social responsibility demands, leading
companies are researching and piloting reverse processes to varying extents. Findings from a
second series of industry interviews reveal a number of regulatory, behavioral, and economic
trends and challenges that collectively shape both strategic considerations for individual
corporations and the overall supply chain capabilities of the industry.
Thesis Supervisor: Randolph E. Kirchain, Jr.
Assistant Professor of Materials Science & Engineering and Engineering Systems
Thesis Reader: David H. Marks
Professor of Civil & Environmental Engineering and Engineering Systems
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Acknowledgements
The opportunity to dedicate two years to personal learning and research is a rare gift, for which I
am very grateful. I have many people to thank.
-
Friends and colleagues at Vanderweil Engineers for encouraging me to pursue a graduate
degree, especially Rand Refrigeri, John Apostolopoulos, Svetlana Zlatin, and Lisa DeVellis;
-
Sydney Miller for all she does to create a community of warmth and support for graduate
students;
-
David Marks and Tim Gutowski for support and teaching along the way;
-
Larry Lapide for giving me the opportunity to share my ideas and complete this thesis;
-
Friends within the Technology and Policy Program for their advice and humor, especially
Kate Steel, Jessica Harrison, and Jessica Cohen;
-
The many professionals who contributed their learning and perspectives to this research,
including Kevin O'Marah, Joseph Fiksal, Peter Lowitt, Roy Wiley, Henry King, Rick
Vanlandingham, Steve Rockhold, Ken Hashman, Bill Olson, Thomas Marinelli, Tom Hellman,
Tom Sipher, Koen Goosens, Shelby Houston, Ed Butler, and Klaus Hieronymi;
-
Jennifer Atlee, Jeremy Gregory, and Jackie Isaacs for collaboration, teaching, and humor;
-
Randy Kirchain, my advisor and editor, for collaboration and critical support that is always
receptive, insightful, and entertaining;
-
All my family and friends for their constant encouragement and love, especially Lou, Dick,
Lauren, and Valerie Paquette, and Megan Colella; and
-
Derek Steinbacher for today and tomorrow.
5
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Table of Contents
Overview .........................................................................................................................................
9
1. Supply chain management and the environment ................................................................
12
1.1 The Case for Concern ..........................................................................................................
1.1.1 Importanceof supply chain management .....................................................................
12
13
1.1.2 Importance of environment............................................................................................14
1.1.3 Importance of the relationship between supply chain and environment .......................
15
1.2 The Case for Action .............................................................................................................
19
1.3 Existing Literature ................................................................................................................
23
1.4 Summary ..............................................................................................................................
27
2. Environmental Pressures .......................................................................................................
32
2.1 Regulations ..........................................................................................................................
33
2.1.1 Directives .......................................................................................................................
33
2.1.2 Taxes and fees ..............................................................................................................
38
2.1.3 Liability ...........................................................................................................................
39
2.2 Consumers and Ethical Responsibility ................................................................................
40
2.2.1 Quality ...........................................................................................................................
40
2.2.2 Cost ...............................................................................................................................
43
2.4 Resources ............................................................................................................................
45
2.5 Summary ..............................................................................................................................
47
3. Supply Chain Environmental Excellence ..............................................................................51
3.1 Integral part of strategy........................................................................................................51
3.2 Distinct operating model ......................................................................................................
52
3.3 Balanced operational objectives..........................................................................................53
3.4 Best business processes.....................................................................................................54
3.1.1 Plan ...............................................................................................................................
55
3.1.2 Source ...........................................................................................................................
56
3.1.3 M ake ..............................................................................................................................
56
3.1.4 Deliver ...........................................................................................................................
57
3.1.5 Return ............................................................................................................................
57
3.5 Summary ..............................................................................................................................
59
6
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
4. Reverse Supply Chain and the Environment ........................................................................
62
4.1 Understanding reverse supply chains..................................................................................63
4.1.1 Reverse supply chain and the environment..................................................................63
4.1.2 Types of reverse supply chains.....................................................................................64
4.1.3 Reverse processes........................................................................................................65
4.1.4 Operating objectives......................................................................................................68
4.2 Reverse supply chain response to environmental pressures ..............................................
68
4.2.1 Attention to end-of-life ...................................................................................................
68
4.2.2 Concern about end-of-life ..............................................................................................
69
4.2.3 Issues with end-of-life ....................................................................................................
70
4.2.4 Regulatory Action ..........................................................................................................
71
4.2.5 Focus on Europe ...........................................................................................................
73
4.2.6 Focus on the United States ...........................................................................................
76
4.3 Lessons learned about developing processes.....................................................................82
4.3.1 Trends ...........................................................................................................................
82
4.3.2 M ajor challenges...........................................................................................................
84
4.3.4 Strategic considerations................................................................................................85
4.4 Sum mary ..............................................................................................................................
87
Conclusion...................................................................................................................................93
Appendix A....................................................................................................................................97
Appendix B..................................................................................................................................
108
Bibliography .................................................................................................................................
131
7
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
List of Tables
Table 4.1: A summary of opposing approaches to compliance in Europe ...............................
75
Table 4.2: Cost comparison for recovery of cellular phones and personal computers ...............
77
Table 4.3: A comparison of leading cellular phone manufacturer activity in the United States.....78
Table 4.3: A comparison of leading computer manufacturer activity in the United States ...........
82
List of Figures
Figure 1.1: Basic supply chain management functions within a network ................................
14
Figure 1.2: Stages of a product supply chain ...................................................................
16
Figure 1.3: An example of supply chain management decision-making .................................
19
Figure 1.4: Environmental concerns prompt changes to supply chain management .................
22
Figure 2.1: Sources of environmental pressures affecting the supply chain ............................
33
Figure 2.2: Industry snapshot - Texas Instrument .............................................................
37
Figure 2.3: Industry snapshot - Limited Brands ................................................................
42
Figure 2.4: Industry snapshot - Interbrew ........................................................................
45
Figure 2.5: Industry snapshot - Unilever .........................................................................
46
Figure 3.1: Environmental operating models ...................................................................
52
Figure 3.2: Environmental operational objectives ..............................................................
53
Figure 3.3: Basic supply chain management functions .......................................................
55
Figure 4.1: Return processes .......................................................................................
65
Figure 4.2: Product life cycles .......................................................................................
69
Figure 4.3: Global take-back legislation in 2005 ...............................................................
72
Figure 4.4: State recycling legislation 2005 ......................................................................
79
8
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Overview
This thesis draws from supply chain and environmental management literature and industry case
studies to 1) characterize the current state of supply chain environmental activity, and 2) identify
pressing challenges for supply chain management at the intersection of these topics. Supply
chain management as an integrating philosophy and practice has characterized the growth of
multi-national corporations over the past two decades. As supply chains continue to mature into
sophisticated networks of material and information flow, so does the ability to carefully trace the
environmental impacts of individual products and activities along the supply chain and address
these impacts proactively.
When I started this thesis, I was primarily interested in how companies are addressing the
regulatory requirements associated with extended producer responsibility legislation. Often
referred to as "take-back"
laws, extended producer responsibility is an environmental initiative to
create incentive for manufacturers to design products for reuse, remanufacture, and recycling by
requiring them to be financially responsible for products at the end of their useful life.
However, after speaking with industry representatives, I realized that this focus was too limited to
capture the changes effecting supply-chains today. Not only do supply-chain regulatory concerns
go beyond take-back laws, but environmental concerns and their implications for supply chain
management go far beyond regulations. In fact, supply chain professionals are facing a wide
range of environmental challenges. Relevant environmental regulations are diverse globally and
include material bans, product certification programs, fuel taxes, solid waste fees, and liability
considerations. At the same time, consumers increasingly demand products and services with
improved environmental attributes, produced by companies that demonstrate social responsibility
through innovative environmental initiatives. Finally, many global corporations are acting to
address issues of environmental variability and climate change and to protect natural resources
that serve as critical feed-stocks for their supply base, such as fresh water, fish, and forest
products. In short, the environmental challenge to the supply chain is much larger than regulatory
compliance. The full range of environmental pressures is diverse, dynamic, and demands new
levels of accountability, financial commitment, and supply chain capabilities. To the supply chain
professional, such changes raise many questions: What happens when environmental
9
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
performance becomes a supply chain objective? How does this change the way that supply
chains are designed and operated? What are best practices? How does environmental
performance affect strategy and the competition in the market? In the future, considerable
technical and organizational innovation will be needed to develop the supply chain processes,
metrics, and relationships to address these questions.
While corporations may be increasingly receptive to the role of environmental steward, this
intention may or may not be filtering to the functional levels of supply chain management. A
growing body of literature discusses various components of this issue. However, the imprecise
understanding of supply chain management as a discipline becomes even more ambiguous when
adding an environmental component. In environmental management literature, the term "supply
chain" is often used as a proxy for the environmental impacts of a single product throughout its
life-cycle. "Green supply chain" may refer to purchasing preferences that include environmental
criteria, while "supply chain environmental management" describes the practice of requiring
suppliers to meet certain environmental performance standards in their own facilities. Topics
further include methods for assessing supply chain environmental impacts, incentives for
improving the environmental performance of the supply chain, suggestions for building
management capacity for change, and process-specific research addressing reverse logistics or
materials tracking. The increasing numbers of case studies and anecdotal data reflect the
interest and timeliness of these papers. Nonetheless, what is lacking in this relatively new genre
of research is a theoretical framework that describes generally an approach for developing
operational business processes that appropriately support environmental objectives and business
strategies. Such a framework may be used to bridge the efforts of environmental management
and supply chain management in theory and practice, while serving as an anchor for prescriptive
advice on how to best respond to environmental pressures.
This thesis lays the foundation for the development of a theoretical framework and future
empirical research. It draws from environmental and supply chain management literature as well
as industry case studies to characterize the current state of supply chain environmental activity.
The challenge in writing this thesis was to tackle two very large issues - environment and supply
chain management - in a clear and convincing way that may be relevant to future analysis. This
thesis is meant to be very straightforward in both purpose and message. As environmental
pressures become more diverse and demanding in the future, the most successful companies will
be those who design and operate their supply chains appropriately.
10
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Chapter 1 explores the relationship between supply chain management and the environment. The
design and operation of supply chains impacts the natural environment in both direct and indirect
ways. While this impact may not be explicitly measured, supply chain processes in general bring
great efficiency to a linear production system that is environmentally intense. Current trends in
supply chain and environmental management suggest that corporations will increasingly turn to
supply chain management to simultaneously mitigate environmental implications and promote
business goals. The chapter concludes with a review of existing literature addressing the extent
of this relationship and strategies for managing it.
Chapter 2 presents an assessment of the four sources of environmental pressures that impact
the supply chain, including: consumers, regulations, resources, and ethical responsibilities.
This
content is based on findings from an initial round of four in-depth industry interviews, along with
supporting research.
Chapter 3 relates a framework of supply chain excellence to supply chain environmental
excellence. The chapter examines the MIT Supply Chain 2020 four statement hypothesis defining
an "excellent supply chain" with respect to environmental excellence, and introduces some of the
many business processes that could yield environmental improvements and business value.
Chapter 4 revisits the issue of extended producer responsibility in the context of environmentally
motivated reverse supply chain processes. The chapter begins with a closer look at the
operational dimensions of reverse supply chains. It describes the environmental pressure posed
by current legislation in Europe and the United States, and outlines what leading electronics
companies are doing and learning in direct response. The content of this chapter is based on
findings from eight interviews with electronics companies, along with supporting research.
The thesis ends with conclusions that summarize key findings and areas for future research. This
work represents just a small piece of the large scope of research that may be done in this
emerging area, including future qualitative and quantitative research to present a path towards
the proactive development of supply chain processes that enable increased profitability and
environmental sustainability.
11
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
1. Supply chain management and the environment
The environment is a supply chain management issue.
Understanding and shaping the relationship between supply chain management and the natural
environment is critical not only to human health and the environment, but to the future success of
business. The cumulative environmental impacts of industrial production are best addressed at
the supply chain level. A growing body of literature promotes this end and proposes tools and
approaches to do so. 123
Nonetheless, very little research has connected the overall context of a
supply chain, including the characteristics and interplay of environmental pressures and market
drivers, to process level changes within the supply chain that can deliver environmental and
economic performance improvements. The purpose of this thesis is to examine this connection,
considering both the interests of society and supply chain decision-makers.
The introduction of
environmental concerns may broaden the scope of supply chain management too far, as an
already ambiguous area of research and practice. Nonetheless, societal demands and physical
limitations increasingly pose challenges for corporations to address the environmental impacts of
mass production and consumption. Supply chain management is the operational level at which
industrial reform is most appropriate.
Chapter one describes the importance of both supply chain management and the environment to
the future success of corporations, and examines the complex relationship between these two
areas. The chapter also explores the potential for corporations to leverage supply chains in
promoting environmental stewardship and outlines existing literature on this topic. Finally, it
explains why supply chain processes should be developed in direct response to specific
environmental pressures and market drivers as a preface to the rest of the thesis.
The information presented in this chapter was collected from an extensive literature search that
involved both supply chain and environmental management literature.
1.1 The Case for Concern
There are certainly many altruistic reasons for corporations to worry and act on behalf of the
environment. However, there are also compelling business reasons. This section draws a
12
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
connection between supply chain management and the environment and describes how
management of this connection is in the best interest of corporations.
1.1.1 Importance of supply chain management
The emergence of supply chain management as an integrating philosophy and practice has been
heralded as creating marked growth in corporate production and profitability.
4
Originally coined in
1992, the term supply chain management continues to evolve in definition and scope. In essence,
supply chain management is a holistic approach to controlling the transformation and flow of
materials from supply to distribution s It merges traditionally supportive business functions
including purchasing, inventory management, and logistics into a single set of strategic
processes. While there is no explicit and universal definition of supply chain management,
common themes are present in a growing body of applied research:6 ' 7 8
Supply chain management improves operational performance.
Integration of disparate business functions - planning, product design, sourcing, manufacturing,
fabrication, assembly, transportation, warehousing, distribution, and post-delivery customer
support - allows system-wide optimization and reduces uncertainty about product volumes and
flows. Information technology plays a key role in this development. The supply chain approach
allows companies to "meet customer needs more quickly, less expensively, and through more
channels." 9
N
Supply chain management improves financial performance.
Operational savings and better customer service increases profitability. In 2001, Accenture
surveyed one hundred and fifty Fortune 1000 executives about the performance of supply chain
initiatives. Eighty percent indicated that supply chain initiatives have helped to ucut costs, improve
efficiencies, enhance customer service and revenues, and improve competitiveness."
·
°
Supply chain management is a source of competitive advantage.
In a global economy where almost all companies are linked through a sequence of transactions,
supplier relationships and operational coordination becomes a quality that is difficult to replicate."1
The importance and pervasiveness of supply chain management is further indicated by the
growing number of research papers, trade publications, professional organizations, and graduate
degrees dedicated to the discipline. This serves as evidence that supply chain management will
continue to grow in importance in corporate functioning.
13
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Figure 1.1: Basic supply chain management functions within a network
_
>
;
CompanyA
7E
MEF-EM\
7
--E
iW
"IX
Basic supply chain management functions of CompanyA
1.1.2 Importance of environment
In 1991, the World Business Council for Sustainable Development was created in order to involve
corporations in the 1992 United Nations Conference on Environment and Development in Rio de
Janeiro. Starting as an informal consortium of approximately fifty executives, the Council has
since grown to involve 170 multinational companies from more than 20 major industrial sectors
with 45 regional organizations. 1 2 The Council has published several dozen reports with the
underlying assumption that "business is good for sustainable development and that sustainable
development is good for business." This body of research represents not only a critical agenda
for change in corporate practices, but also a new wave of thinking about the direct relationship
between environmental and business performance.
In growing recognition of this relationship, many corporations publicize information about their
environmental practices. A study completed in 2002 reported that 63% of global Fortune 500
companies included some form of environmental information on their websites.'
3
At least 36% of
the top 100 companies in the United States publish annual reports that cover issues of social and
environmental performance.
4
A survey of 140 companies, many of which are in the Fortune 100,
showed that 75% report adopting environmentally-responsible
business practices.'5 These types
of statistics indicate that at the very least there is the perception among corporate leaders that
environmental practices are important and may contribute tangibly to business performance.
14
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Beyond that, a large body of literature outlines many reasons for why the business community
should care about the environments
At the heart of this research is the implication that "many of
the non-financial concerns associated with sustainability are fundamental drivers of long-term
shareholder value.... failure to recognize these strategic issues threatens the very survival of a
business enterprise."1 7 Therefore, awareness of and strategy for addressing environmental
issues is an essential corporate undertaking.
One area that certainly impacts business practices is the availability of natural resources or
ugoods and services" from the ecosystem necessary for both production and consumption.
Protecting these resources is akin to protecting long-term investments to insure future viability. In
a report released July 2005, the Millennium Ecosystem Assessment team described ramifications
of damage to the ecosystem for business and industry.1 8 Several broad conclusions were drawn:
*
If current trends continue, ecosystem services that are freely available today will cease to be
available or become more costly in the near future. The higher costs that primary users may
face will be passed downstream to secondary and tertiary industries and will transform the
operating environment of all businesses.
*
Loss of ecosystem services will also affect the framework conditions within which businesses
operate, influencing customer preferences, stockholder expectations, regulatory regimes,
governmental policies, employee well-being, and the availability of finance and insurance.
*
New business opportunities will emerge as demand grows for more efficient or different ways
to use ecosystem services, mitigate impacts, or to track or trade ecosystem services.
Innovation and new technologies can play a key role in the creation of these new business
opportunities. Many leading companies are already capitalizing on these needs and trends.
Echoing these conclusions, researcher Steven Hart writes the basis for gaining competitive
advantage in the coming years will be rooted increasingly in a set of emerging capabilities that
facilitate environmentally sustainable economic activity." 19 As the reasons and apparent
willingness for corporate environmental activity increase, it is not entirely clear what these
"capabilities
are and whether or not they currently exist. Nonetheless, it is safe to say that the
environment will be an important business issue in the future.
1.1.3 Importance of the relationship between supply chain and environment
Supply chain management is the firm's direct interface with the natural environment. As a
mechanism for controlling the physical flow and transformation of materials within and through
organizations, corporations directly impact the environment through their supply chains. Some
15
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
decisions made by corporations bear indirect environmental impacts. For instance, the design of
a product will define how it impacts the environment during consumer use phase. However, as
supply chain management becomes more important to business and the environment becomes a
greater concern to business, the more likely the corporations will turn to supply chain
management processes to address environmental issues. This section explores the unique
overlap between these two areas.
Figure 1.2: Stages of a product supply chain
Each stage of the production system impacts the environmentin different ways: emissions, use of resources, toxicity.
I
.--- )
I
I
4
L
4
ANNE->
I
The success of supply chain management as a decision-making framework may be attributed to
the ability to optimize operations system-wide for a given outcome. An effective supply chain
organizes production, both industrial and commercial activities, with awareness of system-level
goals - low cost, short time, high reliability, complete use of assets. Altogether, this system meets
or even creates demand by exceeding consumer expectations. At the same time, supply chains
represent a path along which to trace the cumulative environmental impacts of a linear production
system. Each stage of production, from material extraction to final disposal has environmental
affects, ranging from air and water emissions to toxicity and waste. While there is some research
examining the impact of a single product over its life-cycle or along its supply chain,2 0 there is no
systematic treatment of the environmental impacts of supply chain management.
Isolating the degree to which supply chain management as an organizing framework impacts the
environment may be extremely difficult. However, it is useful to begin by discussing the current
environmental effects of generalized supply chain management outcomes. For instance, supply
chains that are optimized for cost in an increasingly globalized and technologically advanced
16
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
economy typically yield three outcomes: 1) more transportation, 2) less environmental
governance, and 3) more global consumption.
Transportation
Advancements in transportation technology combined with low-cost labor in less developed
countries have allowed supply chains to grow geographically.
Over the past seventy-five years
transportation innovations have lowered the unit cost of carrying freight by ship at least 70
percent, and the average revenue per mile for air transport has fallen from $0.68 to at least $0.11
during the same time period. 2 1 Lower transportation costs combined with liberal international
trade agreements has altered the outcomes of supply chain management decisions. For those
firms operating with a strategy of lowest cost, it has proven to be common to choose suppliers
located in regions with low labor rates and overhead expenses, even when the facility is located
thousands of miles away. In fact, the late 1980s and 1990s saw an explosion of overseas
sourcing. In fact, between 1995 and 1998 alone, the tonnage of goods carried by ship rose more
than six-fold to $5.1 billion
total.
22
While many consumers will cite the electronics, automobile,
and steel industries as ones that take advantage of overseas labor, it appears that other
industries are following lower operating costs due to specialization.
For instance, "a study by the
London-based National Food Alliance found that food consumed in the United Kingdom on
average traveled more than 50 percent further over the last two decades. A small jar of
strawberry yogurt eaten in Germany has components that travel more than 3,000 kilometers,
according to a report by the Wuppertal Institute. Though the milk is available locally, the
strawberries are grown in Poland, and the packaging materials come from Austria and
Switzerland."2 3 Although the decision to transport materials, components, and finished products
further offers operational and financial benefits, there are several direct environmental
repercussions:
·
Emissions from air, sea, road and rail transport impact air and water quality.
·
Energy is consumed in fueling transportation, as well as powering offices, warehouses, and
other facilities that are dedicated to logistics functions.
*
Goods are transported in vehicles that are increasing in size and numbers. Their very
existence impacts land use and communities, adding congestion and noise.
Packaging is produced for the sole purpose of facilitating handling and transportation, and
creates waste.
"
Bio-invasion" threatens native plants and species.
17
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
There is a significant body of research that examines the negative environmental impacts of
transportation and mobility,2 4 although it is not made clear that any directly connect transportation
decision-making to a supply chain management framework.
Governance
As supply chains grow geographically, national environmental regulations have relatively less
influence on corporate functioning. Companies may be operating in several countries at once with
regulatory requirements for the environment ranging from extensive to non-existent. Although
labor cost may be the most often cited factor in the decision to move manufacturing operations to
less developed countries, other operational characteristics such as the absence of stringent
environmental regulations may also make these locations attractive. In fact, the most hazardous
industries over the past ten years have become concentrated in the developing world, where
safety practices and environmental enforcement and monitoring are often rudimentary at best."2 5
In the city of Mexicali, near the California border, there are approximately 3200 manufacturing
plants. In a survey conducted in the late 1980s, more than 25% of plant operators cited Mexico's
relatively low environmental enforcement as a consideration in their decisions to locate there.26
There is a significant body of literature that examines the connection between environmental
regulations and manufacturing location decisions,2 7 although it is not clear to what degree this
decision-making is related to the supply chain management framework.
Consumption
If the supply chain is designed and operated to deliver lowest-priced goods, it may be expected
that consumption rates increase because of simple relationships between economic supply and
demand. In this sense, supply chain management enables a larger population of consumers to
have access to a growing number of products. Although outside of the scope of this paper, it may
be useful to examine trends related to cost minimization, consumer purchasing, repair rates,
global manufacturing, and global markets in order to draw specific conclusions about how supply
chain processes increase consumption rates and subsequent environmental implications. In
general however, supply chain management brings considerable efficiency to a linear production
system that encourages higher rates of consumption for better or worse.
Efficiency is not typically something that environmentalists refute. An efficient process generates
output with fewer resources and, usually, less impact. Efficient may be considered synonymous
with effective, resourceful, or "ecologically-aware." However, the efficiency associated with supply
chain management has the potential to lead to environmental degradation, by opening up
18
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
production conditions with attractive financial but unattractive environmental characteristics.
Consider this simple example:
Figure 1.3: An example of supply chain management decision-making
2000miles
1000miles
SupplierA
SupplierB
* Production
cost / unit= $8
* Production
cost / unit= $12
* Transportation
cost/ unit= $10
* Transportation
cost / unit= $5
* Totalcost= $18
* Totalcost= $17
+ 40%transportation
efficiencies
+ 40%transportation
efficiencies
* Transportation
cost/ unit= $6
* Transportation
cost / unit= $3
. Totalcost = $14
.Totalcost = $15
Here, Supplier B manufactures components for $12, ships components for $5, and is located
approximately one-thousand miles away. Supplier A manufactures identical components for $8
and ships for $10 since the facility is located two-thousand miles away.
Based on lowest cost,
the purchaser selects Supplier B - a decision that is also environmentally preferable because it
reduces total distance traveled. However, a new innovation in transportation technologies or
transportation planning yields fuel savings of 40 percent, lowering shipping costs accordingly.
Now, Supplier B can deliver finished components for a total cost of $15. Supplier A can deliver for
a total cost of $14, so the purchaser selects Supplier A. As such, the improved efficiency of
logistics actually leads to a net increase in the environmental impact of transportation.
While it may be near impossible to measure the impacts that supply chain management as an
orientation and practice have had on the environment, it is clear that the outcomes of this
orientation promote environmentally-intensive
behaviors. While this is certainly the case today, a
shift in design criteria, values, or perspective could change supply chain decision outcomes.
1.2 The Case for Action
As a decision-making framework, supply chain management offers sufficient scope and leverage
to re-orient corporate behavior towards more environmentally-responsible
outcomes. Anthony
Nieves, president of the Institute for Supply Management's Commission on Social Responsibility,
19
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
notes that "supply chain managers are well-positioned to be catalysts for (environmental
initiatives) because of their positions in the company. They interact with other functional areas of
the organization as well as externally with suppliers and customers. They can have huge
influence."2 8 This section discusses why the relationship between supply chain management and
the environment could be transformed into one that is mutually beneficial.
In a paper titled "Business Decisions and the Environment: Significance, Challenges, and
Momentum of an Emerging Research Field," Andrew Hoffman echoes the sentiments of the
World Business Council on Sustainable Development in saying that "no solution to the
environmental problems society faces will be solved without the involvement of business."2 9 He
cites four lines of reasoning in support of this statement:
1. Governmentsno longer possess the full array of resources and knowledge necessary to
dictate environmental solutions to business. Many within policy circles now agree that
business must become a participant in the environmental regulatory process if sustainable
and economically efficient solutions are to be found.
2.
The power of business organizations to determine the structures of our social, economic, and
political activity has grown to such enormous proportions that industry now possesses the
most resources both individually and through markets to create more efficient coordinating
mechanisms.
3.
Industry is in general the sources of technological evolution within society. As such, firms
best understand the technical tradeoffs that innovation choices may involve. While
environmentalists and others may appreciate the impacts of systemic change, firms
understand the underlying technical and economic aspects of innovative activities.
4.
Business decisions about what inputs to use and how to manage outputs ultimately
determine environmental quality. Industry bears the direct cause and effect link to
environmental problems, such that it is the most vulnerable institution to social and political
challenges for change.
Taken together, this reasoning may very easily apply to a discussion about supply chain
management. To begin with, one may write that no solution to the environmental problems
society faces will be solved without the involvement of supply chain management. As supply
chains expand into numerous countries and regulatory structures, the relative influence of
national requirements may be weaker. However, if supply chains are designed and operated with
explicit environmental goals, then environmentally-preferable
activities could ripple through the
supply chain defining the behavior of many linked corporations operating in as many countries.
Today, regulatory shifts of some countries, including the United States, are predicated on the
20
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
belief that voluntary partnerships and programs incite corporate innovation that will have more
significant environmental benefits than those prescribed by legislation.3 0 For instance, the United
States EPA enlists voluntary efforts from corporations and local communities in the Resource
Conservation Challenge program. The EPA states that "EPA cannot achieve resource
conservation goals on its own or regulate them into place. The transformation to a new way of
thinking about wastes and materials is a joint effort between EPA, businesses, and
communities."
31
Another example is provided by the Suppliers Partnership for the Environment, a
collaboration between EPA, National Institute of Standards and Technology, and a consortium of
suppliers within the automobile industry. The mission of the Suppliers Partnership is to identify
and pursue "opportunities
within the automobile supply chain to improve the environment and the
bottom lines of our member companies.
"32
32
The combination of governments turning to
corporations for voluntary environmental leadership and of corporations leveraging networks of
suppliers and customers to meet operating goals, presents considerable prospects for the
alignment and expansion of corporate and governmental environmental initiatives on a global
scale.
Consider the influence of the largest multi-national corporations. The Fortune 500 is a ranking of
the top 500 American-owned corporations as measured by gross revenue. These companies
jointly represented over $7.5 trillion in revenue in 2004.3 3 Their leverage, both individually and
through markets, is enormous.
First, large corporations collaborate with numerous supply chain
partners. While supply chain management becomes increasingly strategic, relationships with
suppliers may become increasingly purposeful and long-term. 3 4 This business situation enables
environmental innovation to be developed between partners and diffused along the lines of
supply chains into networks of companies and consumers. Second, large corporations have
access to considerable financial resources that are dedicated to research and development of
new products and processes to continually serve the marketplace. These offerings may
incorporate more environmentally-responsible
attributes. Corporations are generally the most
aware of the technical and economic tradeoffs of new products, and also how a shift in
operational priorities may change the composition and configuration of an entire supply chain. If
companies were provided incentives to value environmental performance as much as cost or any
other operating objective, then environmental innovation might occur. Third, large corporations
manage hundreds of individual decisions about material inputs and outputs at the supply chain
level. The cumulative impact of these decisions on the environment makes corporations and their
supply chains prime targets for "social and political challenges for change." Concern for the
21
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
environment translates into regulatory pressures and consumer demands that corporations must
address in order to stay viable.
In a recent article, researcher Lutz Preuss asks "what contribution may supply chain management
make to environmental protection?" 35
As discussed, supply chain management as an integrated
decision-making framework may be applied to attain environmental goals. However, rather than
stating "environmental
protection" as an operating objective, corporations must identify specific
pressures and objectives to define the supply chains response at a functional level. As
environmental problems become more diverse, variable, and demanding, corporations will need
to make innumerable changes to manage supply chains effectively in response. Today, the
appropriate question is not asking whether supply chain management can contribute to
environmental protection, but rather how supply chain resources should be targeted. What
environmental issues are most relevant? What supply chain decision outcomes need to change?
What is the best strategy for change? On which supply chain processes should corporations
focus their efforts?
The complexity of challenges posed by both supply chain management and the environment
suggests that the answer to these questions is not universal. Rather, environmental supply chain
management will involve complex, tailored responses which may vary considerably by context.
Today, there is a growing body of research literature and industry case studies that attempt to
answer the many questions posed by supply chain environmental management.
Figure 1.4: Environmental concerns prompt changes to supply chain management
Societywantschangesat the systemlevel.
fZT {: -~-\, ~
~...._~
So takesactionto affect
firm level.
~chanoe
at -the
so
- -_ .......
..
I
A.
~.3.
_ Changeis implementedat the
supplychainmanagementlevel.
11
22
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
1.3 Existing Literature
Considerable progress is needed to understand fully the relationship between supply chain
management and the environment. A review of over 40 articles written between 1990 and 2005
reveals that there are many exploratory papers, as well as qualitative and quantitative case
studies. What is lacking, however, in this relatively new genre of research is a theoretical
framework that describes generally an approach for developing operational business processes
that appropriately support environmental and business strategies.
To begin with, the imprecise definition of supply chain management becomes further complicated
by the introduction of environmental criteria. In environmental management literature, the term
"supply chain" is often used as a proxy for the environmental impacts of a single product
throughout its life-cycle. "Greening the supply chain" may also refer to purchasing preferences
that include environmental criteria, while "supply chain environmental management" describes the
practice of requiring suppliers to meet certain environmental performance standards in their own
facilities. 36 Q. Zhu defines "greening the supply chain" as intentionally creating networks of
suppliers to purchase environmentally superior products and to pursue common approaches to
waste reduction and operational efficiencies.37
Stefan Seuring has proposed "integrated chain
management" as a term that encompasses many of the concepts conveyed in "green or
environmental supply chain management."38 Joseph Sarkis explains that lack of consensus in
practice and definition of green supply chain, is not surprising since its foundational elements of
corporate environmental management and supply chain management are both relatively new
areas of study and practice. If the practice of green supply chains is novel, the theory is even
more so, if true theory even exists." 39 This sentiment is echoed by Remko van Hoek in identifying
areas for future applied research in order to set forth "a grounded theory for supply chain
environmental improvements."
40
Altogether, this lack of clarity makes it difficult to prescribe a
generalized approach for supply chain improvements.
Despite the apparent lack of definition and theory, there are several papers that address how to
assess the environmental impact of a product supply chain. This represents a very important
area of research, thematically consistent with life cycle analysis and sustainability metrics. Paul
Kleindorfer writes: "Careful tracking of environmental information, including cost, value, and
performance, is essential in understanding, managing, and legitimizing investments in product
(environmental) stewardship activities in the supply chain." 41 In a case study of Xerox, Ltd.,
23
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Kirsten Mcintyre proposes a single metric that may be used to indicate the environmental
performance of an entire product supply chain as well as each element of the supply chain. She
asserts that: Until the environmental becomes represented by an easily understood, top-level
metric, it will be difficult to achieve the level of environmental integration which will be required to
42
Roland Clift developed case studies
make the leap into long-term environmental sustainability."
of several industries to demonstrate how to account for environmental impacts along the supply
' an approach that is also espoused in a industry report published by the US
chain,43 44
Environmental Protection Agency. 45 In many cases, the motivation for tracking environmental
indicators is to select appropriate suppliers. M.H. Nagel and A.C. Brent propose an
environmental performance metric for assessing a supplier's production facility. Adam Faruk et al
describes an approach for "analyzing, mapping, and managing environmental impacts along
46
supply chains" for the purpose of reducing environmental stress.
There is also a growing body of literature that relates to specific supply chain management
47
processes. Nagel focuses on procurement functions, Handfield discusses commodity
strategies,48 and Hall focuses on the exchange of environmental information and practices
between customer and supplier.49 (there was a paper about transportation optimization?) Greener
50
Management International explored several of these processes in a special issue.
Considerable attention has also been devoted to understanding reverse supply chain processes,
including reverse logistics and remanufacturing. California Management Review recently
dedicated entire issues to this topic. 51
Several researchers have addressed management approaches for implementing environmentally
improved supply chain processes. Key to this area is basic decision-making. Joseph Sarkis
presents how an analysis of supply chain management elements may serve as a foundation for a
multi-attribute strategic decision framework. 5 2 T. Kuo has developed a similar method for decision
making including both environmental and economic factors.? Fiksel proposes that decisions may
be shaped by a controlled, six-step protocol that encourages explicit consideration of the
environment in product, network, or system design.54 Many further question whether or not there
is a certain management capacity that must be demonstrated prior to engaging in environmental
supply chain activities, such as successful implementation of environmental management
systems. Curkovic empirically shows a strong relationship between "total quality management"
capabilities and the ability to implement environmentally responsible manufacturing systems
related to supply chain management. 5 5 Bowen examines supply chain management performance
as a pre-requisite to "green supply."56
24
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Finally, there are a significant number of papers that describe technical and organizational
challenges to supply chain environmental activities. These include:
*
Inadequate tools.
It may be extremely difficult for supply chain professionals to integrate environmental information
into a design process. Handfield et al demonstrates through a study of ten environmentallyoriented firms that a large gap exists between the environmentally responsible (process)
supporters and users of environmentally responsible (process) tools in terms of expectations,
perceptions and orientations." 5 7
*
Inappropriateincentives.
Internal incentive structures are critical to the success of all new initiatives, particularly
environmental activities which alter supply chain managementdecision outcomes. Handfield
explains that as environmental strategies filter to the functional and commodity level strategy
development process, managers must consider how this will affect the performance metrics used
to evaluate the supply chain management groups."58
*
Displaced efforts.
Given the broad scope of environmental activities, it may be challenging to focus efforts
appropriately on a process, or to execute that process in the best manner. Swarr explains that
managers should focus on high risk processes and suppliers. Burdensome administrative
requirements are frequently placed on suppliers "regardless of the risk posed to the original
equipment manufacturer...A
risk assessment methodology is needed to...focus effort and
resource by identifying the industry sectors or commodity groups within the supply line that
present the greatest environmental risk to the business."5 9
*
Structural barriers.
Corporate management structure impacts the ability to implement supply chain environmental
activities. Preuss points out that "the marginal contribution of supply chain management to
environmental protection initiatives contrasts both with the function's increasing economic role
and with the general tenor of environmental policy documents."
s
This disconnect may be
attributed to the role of supply chain within companies. In the future, supply chain managers
should participate in cross-functional teams and management boards. They should be further
encouraged to develop long-term relationships with innovative suppliers. 61
*
Learning curve.
The Global Environmental Management Initiative reports that leading companies are just
beginning to understand the value that environmental activity brings to supply chain
management. "The barriers that can prevent environmental, health, and safety activities from
25
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
adding value (to supply chain management) are similar to those that have impeded past efforts at
supply chain innovation - namely resources limitations, resistance to change, lack of adequate
models, and lack of champions for integrated thinking."
Altogether, the growing body of literature indicates that there is interest in and incentive to
account for and mitigate the environmental impacts of supply chain processes. What is lacking,
however, in this relatively new genre of research is a theoretical framework that describes
generally an approach for developing operational processes that appropriately support both
environmental and business strategies. Essentially, this means that certain environmental
standards, for lack of a better word, need to be specified as criteria in supply chain decisionmaking. These standards may serve as operating objectives for the management of supply chain
processes that are developed in a context defined by specific environmental pressures and
market drivers.
While existing research contributes significantly to a general framework, it falls short in three
primary ways:
1.
Existing research is not specific in identifying various sources of environmental pressure on
the supply chain. Many papers group several environmental challenges together as a single
motivation for supply chain improvement. However, such simplification cannot guide the
development of supply chain processes. For instance, an appropriate response to new
environmental regulations may be quite different from an appropriate response to market
demands for products with environmental attributes. Regulations and consumer demands
represent two different sources of environmental pressure on the supply chain, and likely
entail different time frames, technologies, and levels of competition between corporations. A
clear understanding of the various sources of environmental pressures may allow supply
chain professionals to develop the most appropriate processes for environmental and
economic improvement.
2.
Existing research is not specific in proposing environmental objectives for supply chain
management. Many papers cite "environmental improvement" as a broad operating goal.
However, supply chains are best designed to meet specific and measurable operational
objectives. These objectives must be aligned with overall corporate strategy and operating
model. In addition, while metrics applied to an entire product supply chain may be useful for
industry-level research, they do little to guide process-level decisions and are difficult to
balance with conventional supply chain performance metrics. A clear understanding of how
environmental processes may be integrated into corporate strategy and indicated by
26
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
appropriate performance metrics may allow supply chain professionals to build competitive
advantage with environmental supply chain practices.
3.
Existing research presents case studies and anecdotal details about specific supply chain
processes. However, prescriptive advice that is either too general or too specific without
adequately providing context is not generally useful. Supply chain processes, such as
reverse logistics and purchasing, are influenced by a wide variety of internal and external
market drivers. As environmental pressures become more diverse and demanding, the
success of individual processes will depend on political, economic, social, and physical
limitations. A clear understanding of market trends and challenges allows supply chain
professionalsto make strategic considerations in the development of appropriate processes.
These areas will be explored further in the next three chapters.
1.4 Summary
Supply chain management and the environment represent two areas that are increasing
important to the business community. As environmental concerns become more diverse and
demanding, leading corporations may leverage supply chain processes to advance environmental
and business goals. A growing body of literature addresses the complex relationship between
these two areas, however, there is no theoretical framework that describes generally an approach
for developing operational business processes. There is likely no universal prescription. Rather,
appropriate supply chain processes will be developed in response to specific environmental
pressures, within a framework of corporate strategy, informed by a context of market drivers.
27
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
1 Preuss, Lutz, "Rhetoric and Reality of Corporate Greening: a View from the Supply Chain
Management Function," Business Strategy and the Environment, 14, (2005): 123-139.
2 Global Environmental Management Initiative, "Forging New Links: Enhancing Supply Chain
Value through Environmental Excellence," GEMI Report, June 2004, available at
www.gemi.org/supplychain/, accessed July 30, 2005.
Handfield, Robert, Sroufe, Robert, and Walton, Steven, Integrating Environmental Management
and Supply Chain Strategies," Business Strategy and the Environment, 14, (2005): 1-19.
3
Lummus, R.R., Vokurka, R.J., Defining supply chain management: a historical perspective and
practical guidelines," Industrial Management and Data Systems, 99/1, (1999): 11-17.
4
5 Ellram,
L.M., "Supply Chain Management: The Industrial Organization Perspective,"
International Journal of Physical Distribution and Logistics Management, 21, (1991): 13-22.
Geneshan, Ram, Jack, Eric, Magazine, M.J., Stephens, Paul, "A Taxonomic Review of Supply
Chain Management," in Tayur, Geneshan, and Magazine, eds., Quantitative Models for Supply
Chain Management, Kluwer Academic Publishers, (1998): 839-879.
6
7
Lummus, 1999.
8 Giannakis, M., Croom, S., Slack, N., "Supply Chain Paradigms," in New, S.J., Westbrook, Roy,
eds., Understanding Supply Chains: Concepts, Critiques, and Futures, Oxford University Press,
(2004): 1-16.
9 Anderson, David, Delattre, Allen J., "5 Predictions That Will Make You Rethink Your Supply
Chain", Supply Chain Management Review, September/October, (2002): 24-30.
'0 Ibid.
I Hart, S.L., "A natural resource based view of the firm," Academy of Management Review, 20/4,
(1995): 986-1014.
12
World Business Council on Sustainable Development, www.wbcsd.org, accessed August 13,
2005.
Rikhardsson, P., Anderson, A.J.R., Bang, H., "Sustainability Reporting on the Internet, A Study
of the Global Fortune 500," Greener Management International: The Journal of Corporate
Environmental Strategy and Practice, 40, (2002): 57-75.
13
KPMG, "International Survey of Corporate Sustainability Reporting 2002," KPMG U.K., London,
(2002), referenced in Bakshi & Fiksel, 2003.
14
Price Waterhouse Coopers, "Sustainability Survey Report," (2002), referenced in Bakshi &
Fiksel, 2003.
15
16
Andrew Hoffman outlines many reasons for "corporate environmentalism"
and describes
emerging multi-disciplinary research related to this area. See complete reference below.
28
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
17 Bakshi, B.R., Fiksel,
J., "The quest for sustainability: Challenges for process systems
engineering," American Institute of Chemical Engineers, AlChE Journal, 49/6: (2003), 1350.
18 Millennium Ecosystem Assessment, Ecosystems and Human Well-being: Opportunities and
Challenges for Business and Industry" July 2005, available at
accessed August 13, 2005.
www.millenniumassessment.org/en/index.aspx,
Hart, S.L., "Beyond Greening: Strategies for a Sustainable world," Harvard Business Review,
75/1, (1997): 66-77
19
Among the most recent books published about product life cycle analysis is The Hitch Hiker's
Guide to LCA by Henrikke Baumann and Anne-Marie Tillman, published in 2004.
20
French, Hillary, One World?" Vanishing Borders: Protecting
Globalization, W. W. Norton & Company, 2000.
21
22
Ibid.
23
Ibid.
the Planet in the Age of
US EPA, Office of Policy, Planning, and Evaluation, Indicators of the Environmental Impacts of
Transportation Highway, Rail, Aviation, and Maritime Transport," EPA 230-R-96-009, October
accessed August 20, 2005.
1996, available at www.epa.gov/otaq/transp/96indict.pdf,
24
Hillary French provides an excellent discussion and several resources about the role of
environmental considerations in manufacturing location decisions.
25
John Holusha, Trade Pact May Intensify Problems at the Border," New York Times, 20 August
1992, referenced in French, 2000.
26
Jaffe, Adam B., Peterson, Steven R., Portney, Paul R., Stavins, Robert N., Environmental
Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?"
Journal of Economic Literature, 33, (1995): 132-163.
27
Quinn, Francis J., "Why Social Responsibility Matters: An Interview with Anthony Nieves"
Supply Chain Review, 8/6, (2004): 46-50.
28
Hoffman, Andrew, Business Decisions and the Environment: Significance, Challenges, and
Momentum of an Emerging Research Field," in G. Brewer and P. Stern (eds.) National Research
Council, Decision Making for the Environment: Social and Behavioral Science Research
Priorities, 2005.
29
US EPA, Office of Policy and Reinvention, Taking Stock for the Future: A Management
Review of Partnership Programs at EPA," August 31,1999.
30
US EPA, Office of Solid Waste, Conserving our Natural Resource: Basic Information,"
available at www.epa.gov/epaoswer/osw/conserve/basic.htm,
accessed August 20, 2005.
31
Suppliers Partnership for the
accessed August 20, 2005.
32
Environment,
29
available
at www.supplierspartnership.org/,
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
3Fortune Magazine,
PRESSURES
The 2004 Fortune 500," 2004.
34
Preuss, 2005.
35
Ibid.
36
Business for Social Responsibility, "Supplier's perspectives on greening the supply chain: A
report on suppliers' view on effective supply chain environmental management strategies," June
2001, available at www.p2pays.org/ref/20/19927.pdf, accessed August 13, 2005.
37
Zhu, Q., Cote, R.P., "Integrating green supply chain management into an embryonic ecoindustrial development: a case study of the Guitang Group," Journal for Cleaner Production:
Applications of Industrial Ecology, 12/8-10 (2004): 1025-1035.
3 Seuring, S., "Integrated
chain management and supply chain management comparative
analysis and illustrative cases." Journal of Cleaner Production: Applications of Industrial Ecology
12/8-10, (2004): 1059-1071.
Sarkis, J., How green is the supply chain? Practice and research," Working Paper,
Clark University, 1999.
39
Hoek, Remko I. van, From reversed logistics to green supply chains," Supply Chain
Management, 4/3, (1999): 129-137.
40
Kleindorfer, P. and E. Snir, Environmental Information in Supply Chain Design and
Coordination," in Richards, D., Allenby, B.R., Dale, W. (eds.), Information Systems and the
Environment, 2001.
41
McIntyre, K., Smith, H., et al, Environmental performance indicators for intergrated supply
chains: the case of Xerox, Ltd.," Supply Chain Management, 3/3, (1998): 149-158.
42
Clift, R. and Wright, L. "Relationships between Environmental Impacts and Added Value Along
the Supply Chain," Technological Forecasting and Social Change, 65, (2001): 281-295.
43
44 Clift, R., Metrics for supply chain sustainability," Clean Technologies and Environmental
Policy, 5/3-4, (2003): 240-252.
US EPA, Office of Pollution Prevention
Practical Guide for Materials Managers
Improve Environmental Performance."
www.epa.gov/opptintr/acctg/pubs/lean.pdf,
45
and Toxics, The Lean and Green Supply Chain: A
and Supply Chan Managers to Reduce Costs and
EPA 742-R-00-001, January 2000, available at
accessed August 20, 2005.
Faruk, A.C., Lamming, R.C., "Analyzing, Mapping, and Managing Environmental Impacts along
Supply Chains," Journal of Industrial Ecology, 5/2, (2002): 13-36.
46
Nagel, M. H., "Environmental supply-chain management versus green procurement in the
scope of a business and leadership perspective," 2000 IEEE International Symposium on
Electronics and the Environment, Oct 8-10 2000, San Francisco, CA, Institute of Electrical and
Electronics Engineers Inc., 2000
47
48
Handfield, 2005.
30
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
Hall, J., Environmental supply chain dynamics, "Journal
455-471.
PRESSURES
49
of Cleaner Production, 8/7, (2000):
50
Greener Management International, Special Issue on Greener Supply Chain Management, 35,
2001.
51
California Management Review, 46/2, 2004.
52
Sarkis, J., "A strategic decision framework for green supply chain management," Journal for
Cleaner Production, 11, (2002): 397-409
Kuo, T.C., "Applying the Analytical Hierarchy Process to Green Supply Chain Management,"
International Green Productivity Association Newsletter, 5/3, (2003), 1-7.
53
54 Fiksel,
Joseph, "Designing Resilient,
Technology, 37, (2003): 5330-5339.
Sustainable
Systems,"
Environmental
Science &
55 Curkovic, s., Melnyk, S.A., et al, "Investigation the Linkage Between Total Quality Management
Responsible
and Environmentally
Management, 47/4, (2000): 444-464.
Manufacturing,"
IEEE
Transactions
on
Engineering
Bowen, F.E., Cousins, P.D., et al, "The role of supply management capabilities in green
supply," Production and Operations Management, 10/2, (2001): 174-187.
56
57 Handfield, R.B., Melnyk, S.A., Calantone, R.J., Curkovic, Sime "Integrating Environmental
Concerns into the Design Process: The Gap between Theory and Practice,"
IEEE Transactions on Engineering Management, 48/2, (2001): 189-208.
58
Handfield, 2005.
59 Swarr, T.E., Cline, H.J., et al, "Evaluating supply line sustainability and business environmental
risk," Proceedings of the 2004 IEEE International Symposium on Electronics and the
Environment, May 10-13 2004, Scottsdale, AZ, United States, Institute of Electrical and
Electronics Engineers Inc., Piscataway, United States, 2004.
60
Preuss, 2005.
61
Ibid.
31
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
2. Environmental Pressures
Supply chains must respond to four sources of environmental pressures.
Supply chain processes directly and indirectly impact the natural environment. As environmental
impacts grow, so do public concerns for protecting the environment and human health. Concerns
are most visibly translated into environmental regulations that shape the behavior and economics
of industry. However, regulations represent just one source of environmentally-motivated
pressure which affects supply chain decision-making. Though significant, this narrow frame of
reference may be expanded to include three additional sources: resource availability, ethical
responsibility of corporations, and consumer demands for environmentally-advanced
products
and services. It is critical that corporations understand the specific nature and extent of
environmental pressures on the supply chain, in order to respond appropriately with innovative
processes that may address environmental concerns while supporting business goals.
Chapter two describes four sources of environmental pressure that affect supply chain
management uniquely. In addition to a literature review, the information presented in this chapter
was collected from four in-depth interviews with industry representatives. Companies were
selected from industries that have been affected by environmental regulations that significantly
impact supply chain management. These include: consumer packaged goods, fashion retail, and
electronics industries. The companies were also selected because of their involvement with the
Supply Chain 2020 research initiative. Each representative was approached and provided a
questionnaire in advance involving a series of questions about corporate environmental concerns
and activities. Informal transcripts were shared after the interview to allow for clarifying
comments.
32
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Figure 2.1: Sources of environmental pressures affecting the supply chain
defines
i .-deines
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2.1 Regulations
Governments use a variety of regulatory instruments to address the environmental and health
externalities associated with industrial and commercial activities. These instruments include
environmental directives, taxes and fees, and liability. All three affect the pricing and availability
of products and services, and warrant consideration at the supply chain level. This section will
describe the changing nature of environmental regulatory instruments as they may be applied to
supply chain management.
2.1.1 Directives
The most commonly recognized examples of environmental regulation come in the form of
directives, such as pollution limits, material bans, and fuel-economy standards. Regulatory
directives set requirements for industry practices and performance. In the United States, more
than a dozen statutes form the primary legal basis for federal environmental regulations,
including'
2
:
Clean Air Act (1967, 1970, 1977, 1990, 1999) requiring development of National Ambient Air
Quality Standards, Hazardous Air Pollution Standards, Motor Vehicle Emissions Standards,
33
,, , ,
I
I
I
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Fuel and Fuel Additive Standards, Aircraft Emission Standards, and authorizing provisions for
ozone protection
*
Clean Water Act (1972, 1988, 1981, 1987) authorizing regulation of wastewater facilities and
non-point discharges and provisions for federal funding of municipal sewage treatment
systems.
*
Resource Conservation and Recovery Act (1976, 1984, 1986) authorizing regulation and
banning of the generation, storage, transport, treatment, and disposal of hazardous waste, as
well as management of non-hazardous wastes.
*
Toxics Substance and Control Act (1976) authorizing regulation and banning of industrial
chemicals that pose "unreasonable risk" to human health or the environment.
*
Comprehensive Environmental Response, Compensation and Liability Act (1980) allowing
federal funding to remediate sites contaminated from prior unregulated disposal.
*
Superfund Amendments and Reauthorization Act (1986) authorizing the development of
clean-up standards and provisions for increased public participation.
*
Emergency Planning & Community Right-To-Know Act (1986) authorizing the EPA to publicly
report the release and storage of specified chemicals, and requiring emergency planning at
the state level.
*
Pollution Prevention Act (1990) allowing provisions for agencies to support "cost effective"
changes in production, operation, and raw material use through technical assistance and
voluntary partnerships.
Though this list comprises only a few of the more influential statutes from the supply chain
perspective, it represents a discernible shift in the federal government's regulatory approach.
Stringent "command and control" regulation of industrial point-source releases has given way to
agency support for continuous environmental improvement and community risk management.
While this shift has moved targets from end-of-pipe" pollution control to process pollution
prevention, current environmental regulations within the United States focus primarily on the
facility. Facility personnel are responsible for implementing environmental health and safety
activities, efficiency measures, and emergency planning. No formal mandate requires that
environmental management processes and improvements extend beyond this domain. Further,
while facility-focused regulations impact the cost of operations which may very well change the
decisions of supply chain managers, they do not require that any factor beyond cost be explicitly
considered.
34
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Environmental regulations are increasingly focused on consumer products. Products embody the
cumulative environmental impacts from production, use, and disposal. Therefore, regulatory
directives aimed at improving the environmental attributes of individual products effectively impact
industry as a whole. In fact, product-focused regulation is ostensibly supply chain regulation,
because changes to products drive changes to the design and operation of supply chains.
Whereas regulations targeting manufacturing and transport activities at the facility level largely
encourage either compliance or relocation of facilities (both of which are reflected in operation
costs), regulations at the product level require new business processes both within the facilities
that make up the supply chain and between them.
Today, there are at least three categories of regulatory directives that are focused on consumer
products:
Performance requirements.
Standards that address the environmental impact of products during their "use" phase are
relatively established regulatory instruments, including product fuel economy, energy efficiency,
and emissions standards. In the United States, sequential acts for National Energy Policy (1975,
1978, 1992) authorize the Department of Energy to regulate energy (and to a lesser extent) water
efficiency in end-use equipment, appliances, and building systems, notably including Corporate
Average Fuel Economy (CAFE) standards for passenger cars and light trucks. Use of such
standards is increasing across the globe. The European Union recently passed the Directive on
the eco-design" of Energy Using Products 3 which will harmonize and advance the already strict
energy and water efficiency standards across the EU. It is likely that performance targets, as well
as labeling and reporting requirements, will grow more stringent with time. These requirements
place significant demands on product designers and also affect architectural, material, and
process choices. Although it may appear that a change in product attributes has limited impact on
the design and operation of the supply chain, a large body of research suggests that end-product
design alterations affect the entire production system.4 Therefore, product innovation to meet
mounting performance standards will affect fundamental supply chain functions - planning,
sourcing, manufacturing, and marketing.
Material mandates.
Research increasingly correlates damage to the environment and human health to the use of
toxic and hazardous materials. Accordingly, mandates in the United States have moved beyond
manufacturing emissions controls to regulate the use of select materials in consumer products.
In concept, material mandates are nothing new. The Food and Drug Administration has been
regulating the materials of food, drugs, cosmetics, medical devices, and radiation-emitting
35
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
electronics for over a century, representing a large portion of products that consumers purchase s .
The Consumer Product Safety Commission sets guidelines for material use in consumer goods
such as appliances, toys, clothing, and paint. Past mandates have focused on materials that may
directly harm human health due to direct exposure, and include a variety of state and federal-level
6
restrictions on products containing asbestos, lead, and mercury. Today, material mandates are
being applied to a broader range of materials, products, and industries with arguably less direct
health impacts. For instance, the European Union's Restriction on Hazardous Substances
(RoHS) Directive is one of the more aggressive bans of materials in history. 7 The directive
specifically targets the electronics industry and requires the phase out of lead, mercury, cadmium,
hexavalent chromium and two groups of flame retardants in all products by 2008. This type of
material mandate not only challenges the technical capabilities of product designers, but also the
organizational capabilities across the electronics industry. Although materials for electronics are
often selected far up the supply chain for commodity components, RoHS places responsibility for
a complete bill of materials and certification on the final producers, requiring a level of information
exchange and data management unprecedented in the electronics industry. Supply chain
managers will be called upon to manage data, monitor supplier activity, and provide quality
control while coordinating material transitions in existing product lines.
*
Extendedproducer responsibilitylegislation.
In an effort to reduce material waste, conserve resources, and prevent hazardous disposal,
several countries have enacted the principle of extended producer responsibility (EPR) within
statutory frameworks.
EPR directives place financial responsibility for the collection and disposal
of products at the end of their useful life on manufacturers, thereby aiming to create incentive to
redesign products for reuse and recycling. EPR legislation, also referred to as "take-back," is
attractive to policy-makers not only because it is a market-oriented instrument for environmental
improvement, but also because it reduces the burden of waste disposal from individual
municipalities. 8 While deposit schemes for the recovery of aluminum cans and car batteries
represent variations of "take-back" directives, EPR as discussed here has approximately a fifteenyear history beginning with packaging initiatives in Europe. The early efforts of several European
countries were formalized in 1994 by the European Union's Packaging and Packaging Waste
Directive that stipulates national collection systems and recycling quotas. 9 A variety of public and
private systems have developed in response, including Germany's Dual System which collects
waste and coordinates recycling at a profit for producers who pay an upfront fee to display the
"green dot" logo on their packaging.'
EPR directives have since targeted more complex
products, including automobiles, appliances, and electronics. The more aggressive legislative
efforts are coming out of East Asia and Europe, and include Japan's End-of-Life Vehicle
36
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Recycling Initiative (1996) and Home Appliance Recycling Law (2001), and the EU's Directive on
End-of-Life Vehicles (2000) and Directive on Waste Electrical and Electronic Equipment (2002).
Regulations have also been adopted or proposed in Korea, China, India, Brazil, Venezuela, Chile,
and some states within the United States. In order to comply with EPR requirements, companies
must design, implement, and possibly operate comprehensive reverse supply chains."
Representing no small endeavor, reverse supply chains may involve collection facilities, reverse
logistics, partnerships with disassembly and recycling providers, integrated remanufacturing and
reuse plans, and marketing initiatives to encourage consumer participation. Altogether,
take
back" requires considerable organizational, technical, and financial commitment from industry.
Figure 2.2: Industry snapshot1
-
01
1111.0
Texas Instrument
I
0~
0
!l * Lead conversion activities are being managed consistentlywith competitors. Lead conversion represents a reliability
t and environmentalissue that has been researchedfor a number of years.
* T is well positioned to meet the deadline of RoHS, and plans to use Certificatesof Compliance for the majorityof
components in addition to Certificatesof Analysis on high risk components
* Decisions regarding environmentalactivity is primarily compliance driven, but also in responseto market demand.
The Eco-calculator (TI-30EcoRS)is an example of an environmentally-sensitiveproduct offering.
* Demanufacturingfacilities are operated for product retums, but third-party collection and disposal will be contracted to
I comply with the WEEE Directive.
* TI selects suppliers according to weighted performancecriteria that measures reliability, product development
expertise, and environmental programs,among other factors.
This discussion of product-focused directives is in no way exhaustive, rather providing a broad
overview of present and future regulatory directions. Altogether, several broad conclusions may
be drawn:
First, the global nature of today's markets and supply chains complicates regulatory compliance
efforts. The broad and sometimes conflicting requirements of various regulatory bodies must be
managed effectively, presenting an additional element of complexity to supply chain
management. As such, there is considerable incentive to standardize environmental processes
across the supply chain when possible. In the past decade, the United States has taken a much
different approach to regulating industry than other nations - favoring environmental improvement
through voluntary partnerships with corporations over more adversarial and legislative measures.
37
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
While this shift may be preferable for supporting a market-oriented environmental response, it is
likely that the more stringent regulations coming out of Europe and East Asia will set the standard
for performance in all countries for better or worse.
Second, product-focused regulatory directives raise the stakes for industry because they assign
chief responsibility for environmental improvement to the most visible players in the production
chain - the final manufacturers. A requirement that the product embody certain environmental
attributes ensures that some level of improved environmental coordination occurred along the
supply chain, regardless of whether or not the product was imported from a country with little to
no environmental regulations. While regulations that required facility improvements affect
operation costs along the supply chain, product-focused directives change the entire decision
framework of the supply chain, influencing cost and adding environmental criteria to fundamental
processes in sourcing, manufacturing, operations, distribution, and data management.
Third, the optimal supply chain response to product-focused directives will be difficult to
determine in the near future. Not only are global production systems increasingly complex, but
such regulatory frameworks are relatively new, still evolving, and seemingly unclear about
ultimate environmental goals. For instance, it is unclear whether EPR legislation is intended
primarily to minimize waste, reduce the toxic constituents of waste, encourage alternative waste
disposal methods, or achieve a combination of these things. Evidence from past governmental
initiatives suggests that it is difficult to achieve multiple goals with one policy instrument (Walls,
2003). For this reason, it may be presumed that future regulations will require multiple activities
as an integrated response to multiple policy goals.
2.1.2 Taxes and fees
Environmental taxes either "impose a tax cost on a product or activity that is environmentally
damaging or they give a tax benefit to some product or activity that is environmentally
beneficial."1 2 For example, in the United States, the federal government imposes an excise tax on
ozone-depleting chemicals and offers a tax credit to people who buy electric vehicles. In this
sense, environmental taxes do not replace regulatory directives, but rather help regulate the use
of resources by visibly changing the purchase price. Environmental taxes, if applied
aggressively and globally, may transform the way supply chains are designed and operated. For
instance, suppose the United States levied a substantially higher gasoline tax. Logistics systems
might change dramatically in light of escalating transportation costs. This response could either
foster regional supply chains and economic development or irreparably damage international
38
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
markets. Environmental fees create the same affect, increasing the cost of select activities to
environmentally-preferable
ends. Fees may be applied to landfill, hazardous waste, or raw
material extraction, with ramifications that ripple along the supply chain.
While a large body of literature discusses the use of taxation to shape consumer behavior and
raise government revenue 3 , the direct impact of various taxation schemes on the management of
global supply chains is not addressed. Environmental taxes and fees may be effective
instruments for environmental progress, though arguably less effective for supply chain progress.
In changing the visible price of a product or activity, supply chain decision outcomes may be
drastically different, but the decision framework and business processes in place will likely stay
the same.
2.1.3 Liability
Liability for environmental damage serves as pressure for performance improvements. Under
United States tort law and environmental statutes such as the Resource Conservation and
Recovery Act, "strict liability places the full burden of environmental costs on the pollution
generator, independent of the safety or precaution taken by the defendant."' 4 This liability
extends along the supply chain, creating situations where organizations may be held liable for
environmental damage even when that damage is not a direct consequence of their actions. In
the case that larger companies are conducting business with supply chain partners who have
limited assets, it is in the best interest of those large companies to put into place technical support
systems that assure compliance in the use of their products.
5s
In fact, companies that have
relative advantages in certain risk reduction factors should implement these to reduce the liability
of the entire supply chain."1 6 Risk reduction activities may include training initiatives, product
redesign, management of end-of-life products, and service offerings. For example, Greentech
Assets, Inc. in Rhode Island offers recycling services specifically targeted at corporations aiming
to limit the environmental and privacy risks associated with retired electronics.'
7
Ashland
Chemical reduced their own liability and that of their customers by offering chemical services
rather than sales i - on a turn-key basis, taking on all the responsibilities of providing and
disposing chemicals."9
In this sense, liability becomes an extremely effective regulatory instrument for several reasons.
One, assigning liability to the most influential player creates incentive for the adoption and
diffusion of environmental practices. Two, liability also invites pressure for environmental
practices from insurance providers who underwrite industrial activities. Third and perhaps most
39
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
importantly to supply chain processes, liability creates business opportunities to those companies
who have invested in environmental literacy and services because they are able to reduce the
risks associated with the activities of their customers' and the supply chain as a whole.20
2.2 Consumers and Ethical Responsibility
Markets create powerful venues for change since a savvy consumer base continually demands
more value from products, services, and the organizations that offer them. In this sense, end
consumers drive fundamental characteristics of the supply chain, including environmental
performance. This type of pressure for environmental attributes and responsibility creates distinct
market opportunities for supply chains that can deliver the "right product at the right time." This
section will describe how consumer product demands and the ethical responsibilities of
corporations are realized through supply chain level environmental performance.
2.2.1 Quality
Consumers demand quality products. As environmental awareness and expectations increase,
so do demands for products with improved environmental qualities, including energy-efficient
appliances, organic food and fabrics, recycled paper goods, and non-toxic cleaners. Past studies
have shown that pinning down the exact status of environmental consumerism is challenging and
subject to debate. Even as 79% of Americans consider themselves environmentalists and 67%
state they would be willing to pay 5-10% more for environmentally compatible goods," 2 1 actual
buying practices have not supported opinion polls. Consumers rarely accept environmentallypreferred products with inferior performance, and very few are willing to pay a price premium for
environmental attributes.2 2 While environmental expectations may be high all around, many
companies still view the green consumer as a niche market.
Regardless, the niche market has demonstrated consistent growth in recent years and currently
comprises more products with improved environmental attributes than ever before. Sales in select
product categories demonstrate this phenomenon:
*
Organic.
While the conventional food industry is generating a steady 2-3% per year growth, the organic
industry has grown at rates between 17-20% annually for the past several years.23
* Energy-efficient.
40
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Energy Star, a labeling program administered by the United States EPA since 1992 to reward the
most energy-efficient products, has expanded to include 11,000 different models within 40
product categories, ranging from washing machines to light bulbs.24
*
Non-toxic.
Natural household cleaners, including laundry and dishwashing detergents, have risen in sales
from $140 million in 2000 to $290 million in 2004.25
Industrial sales mirror these trends. Purchasing Magazine reported in 2002 that 'the most
significant factor affecting supply, demand, pricing, and availability of solvents is the
environmental issue." While demand for conventional solvents will be essentially fiat at 0.2% per
year growth, green solvents will post robust gains averaging 5.7% per year through 2005.26
The issue of branding adds another element to managing consumer pressures for environmental
performance. Research suggests that environmental expectations are higher when products are
marketed with a strong brand. Since branding efforts essentially encourage consumers to
develop an emotional attachment to a company's image and reputation, consumers in turn expect
a relatively higher level of social and environmental performance. In fact, one of the most
comprehensive surveys conducted in this area, covering 25,000 individuals in 26 countries, found
that "more consumers base their impression of a company on its corporate social responsibility
than do on (product) reputation or financial factors."2 7
A positive "reputation is a valuable corporate asset, hard to build, yet easy to diminish." 28 The
higher the profile of the brand, the more responsibility that that company must take for
environmental activities along its supply chain. Environmental activities, however, represent just
one aspect of the broader corporate social responsibility (CSR) agenda which has gained wide
appeal in the past fifteen years. Also referred to as corporate citizenship, CSR involves the ethical
treatment of employees, resources, the natural environment, communities and nations in which
companies operate. Non-profit advocacy organizations have evoked the concept of CSR to raise
awareness and build pressure for more ethical corporate behavior. For example, Global
Exchange launched an infamous campaign against Nike, Inc. for sub-contracting to "sweatshops"
throughout South East Asia that employed children, required long hours, and maintained no
environmental health and safety policies. 2 9 The Silicon Valley Toxics Coalition condemns brand
name electronics manufacturers for toxic components and hazardous waste as a result of
irresponsible disposal. Their seminal publication, "Exporting Harm: The High Tech Trashing of
41
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Asia," drew public attention to the practice of exporting electronic waste to be processed in parts
of Asia.30
On the other hand, some companies such as Stoneyfield Farm and Aveda have built a name for
themselves on a basis of CSR. The efforts of these companies may drive both consumer demand
for environmentally advanced products and competitive pressure for more responsible behavior in
general. In a time when marketing, media, and public relations define success for many high
profile companies, pressure to project an image of corporate ethical responsibility is very high.
While it may be relatively easy to pay tribute to CSR in annual reports, it appears considerably
more challenging to implement and enforce practices along the supply chain that yield
measurable environmental benefits.
Figure 2.3: Industry snapshot-
Limited Brands
* The issues faced by Limitedare very different from organizationsthat are vertically integratedand highly regulated.
* Limited's supply base and operations will be affected by environmentalissues,regulations,and energy productionin
China and developingcountries.
* Limitedis currently involved in several product stewardship initiatives.
* Environmentalinitiatives must be balanced with business strategy and support Limited's branding efforts.
*Vendorsin China and developing countries that partner with Limited typically maintain internal codes of practicesand
are audited for environmental performance.
Altogether, consumer demands create serious challenges for supply chain management because
while environmental expectations are high and extend beyond final manufacturers to include
multi-tiered suppliers, consumers are unwilling to sacrifice product performance or price.
Improved environmental performance, whether necessitated by regulatory directives or consumer
demand, require product design changes which ultimately affect supply chain functions in
planning, sourcing, manufacturing, and marketing. In the case of directives, often regulatory
agencies provide technical assistance and facilitate compliance activities to a degree. However,
the onus of meeting consumer pressures for environmental improvement in a time of greater
corporate ethical responsibility is on those who sell the products.
42
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
2.2.2 Cost
Consumers also demand competitively-priced products. In order to offer the "right price" and
maintain profitability, production system costs must be carefully balanced with performance along
the supply chain.
Ample anecdotal and empirical evidence suggests that environmental waste equals financial
waste in production systems. 31 High utilities, fuel costs, and waste disposal fees provide incentive
for the adoption of environmental management systems that streamline production and yield
greater efficiencies along the supply chain. An oft-cited paper by Michael Porter and Claas van
der Linde published in 1995 presents basic reasoning for environmental improvements as
investments that yield both product and process benefits and possibly create major competitive
advantages in innovation and operations.3 2 These mechanisms for efficiency include:
*
*
Process.
-
substitution, reuse, or recycling of production inputs;
-
less downtime through more careful monitoring and maintenance;
-
better utilization of by-products by conversion of waste into valuable forms;
-
lower energy consumption during the production process;
-
reduced material storage and handling costs;
-
savings from safer workplace conditions; and
-
elimination or reduction of the cost of activities involved in discharges or waste disposal
Product.
-
higher quality, more consistent, safer products;
-
lower product costs;
-
lower packaging costs;
-
lower net costs of product disposal to customers; and
-
higher product resale and scrap value
This concept of keeping operation costs low through environmental improvements has been
plugged by business environmentalists for years as the illustrious "win-win" situation. As such,
there are abundant anecdotal case studies that endorse the use of environmental management
systems and processes both within individual facilities and as collaborative efforts between
supply chain partners.3 3 In a document published in 2000, the EPA reported that34:
GM reduced disposal costs by $12 million between 1987 and 1997 by establishing a reusable
container program with its suppliers. Additionally, reusable containers can reduced solid
43
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
waste, product damage during shipping, and worker safety problems that come with slicing
open boxes.
*
Andersen Corporation developed a composite material from wood wastes generated during
its manufacturing process. This innovation yielded internal rates of return exceeding 50% and
enabled Andersen to decrease solid lumber purchases by 750,000 board-feet.
*
Public Service Electric and Gas Company saved more than $2 million in 1997 in storage and
product disposal fees by requiring maintenance and operating material suppliers to adhere to
stringent return policies. These costs had previously been hidden in overhead accounts.
Examples like these may be found in many publications, old and new, along with a wide range of
process tools for organizations to identify and implement tailored environmental strategies.
Notably, a tool called GreenSCOR3 s has been developed to merge environmental management
with supply chain management in order to integrate environmental considerations into the entire
supply chain process. An offshoot of the Supply Chain Council's original Supply Chain Operation
Reference model (SCOR), benefits to GreenSCOR include the ability to reduce environmental
impacts and related costs system-wide while supporting traditional supply chain objectives. The
approach also raises the visibility of the financial and operational benefits of environmental supply
chain practices.
While the desire to keep operating costs low is good reason to pursue environmental
performance improvements along the supply chain, this desire does not represent a unique
environmental pressure within this framework. It is perhaps more accurate to group the "win-win"
situations described here as either 1) operational improvements motivated by economic
pressures that happen to demonstrate environmental benefits, or 2) environmental improvements
motivated by regulatory, consumer, or ethical responsibility pressures that happen to yield costsavings. In the future, environmental pressures will require significant and pervasive changes in
supply chain design and operations, changes that will not likely be motivated by incremental cost-
savings.
44
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Figure 2.4: Industry snapshot - Interbrew
* Interbrew's supply chain is influenced on an implementationlevel, ratherthan strategic level, by environmental
legislation and corporate responsibility activities.
* Interbrew's supply chain is well poised to reactto new regulationbecause of a diverse supply base and local
presence.
* Suppliers agree to Interbrew's corporate responsibilitystatement.
* Environmentalmetrics are collected and sared with facility managers to provide benchmarks for environmental
performance.
* In the future, supply chain professionalsare going to need more diverse skills including an understandingof
environmental and social concerns and how they relate to deliveringproducts to customers.
2.4 Resources
Escalating global population and affluence create demand for more and more products. The
corresponding rates of production inevitably place strains on the natural environment's ability to
supply resources and absorb wastes. Traditional supply chains are based on a linear production
paradigm which relies on constant input of virgin natural resources and unlimited environmental
capacity for assimilation of wastes and emissions."3 8 Despite considerable progress in resource
conservation and process efficiency measures, this paradigm is still pervasive. The secure supply
of critical feed-stocks will remain a supply chain challenge into the future.
An examination of the global supply and demand for fish illustrates this point well. The World
Resource Institute reports that consumption of fish and fishing products has doubled in the past
thirty years and has increased five-fold since 1950.
37
"Fish supply has become one of the major
natural resource concerns, as seventy-five percent of commercially important marine and most
inland water fish stocks are either currently being over-fished, or are being fished at their
biological limit."38 This situation bodes poorly for those in the fish business, including global
corporations such as Unilever that sells fish and uses fish products as raw materials. Unilever is
one of the world's leading suppliers of food, home care, and personal care consumer goods. In
the mid-1990s, Unilever launched a comprehensive effort to secure a sustainable supply of fish.
First, they provided seed money to the World Wildlife Foundation to research the situation and
establish the Marine Stewardship Council as an independent organization to certify sustainable
fish supplies. Then, they initiated discussion with competitors and national regulatory bodies in
45
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
support of the Council's standards. Finally, Unilever publicly endorsed the work of the
39
Stewardship Council and committed to purchasing only certified fish.
The availability of energy and water resources for manufacturing also presents a challenge to
supply chain management. Water shortages are increasing world-wide as demand for drinking
and irrigation grows. The United Nations Environmental Program reports that one third of the
world's population lives in countries where consumption exceeds 10% of total supply and more
than 2.7 billion people will face severe water shortages by the year 2025.40 Supply chain
managers must consider resource constraints when locating facilities and planning operations,
since energy and water shortages may dramatically affect business. For example, both Pepsi and
Coca-Cola lost their license to use local groundwater at bottling plants in Kerala, India following a
local drought.4 1
While it may be easy to take for granted the availability of natural resources to support industrial
activities, resource constraints represent a systemic environmental pressure. The most
successful companies will recognize natural limitations, in time to plan for conservation,
substitution, or production of their own feed-stocks. Such a response will require a broader
perspective on the role of companies in providing goods, services, as well as stewardship of the
resources that enable economic success.
Figure 2.5: Industry snapshot - Unilever
5,
· Unilever'score environmentalactivities relateto sustainablefisheries,agriculture, and water conservation.
* Environmentalcosts representa relatively small part of overall lifecycle costs, and less than 10%of manufacturing
costs. Many cost saving activities translate to environmentalsavingsand vice versa.
* Suppliers are managedwith regard to environmentalrisk and performanceunder a code of business principles.
* It is critical to express a particular set of values at the corporatelevel, environmentalor otherwise, in order to operate
outside a cost-driven framework.
* It is importantto identify the best areas in which to be proactive. This decision often comes down to sustainable
business decisions.
46
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
2.5 Summary
Altogether, supply chains must respond to environmental pressures from four sources. Resource
availability and regulatory pressures place physical, legal, and economic constraints on supply
chain management, while consumer demands and the ethical responsibilities of corporations
define desirable behavior in the market and within those constraints. As supply chains mature
and environmental pressures increase, technical and organizational nnovation to support supply
chain processes developed in response to specific pressures.
47
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Beamon, B., "Designing the Green Supply Chain," Logistics Information Management, 12/4,
(1999): 332-342
2 US Environmental Protection Agency, "Major Environmental Laws," 2005,
www.epa.gov/epahome/laws.htm, accessed May 30, 2005.
3 EU, "Directive on the Eco-Design of Energy Using Products,"
2005, accessed June 1, 2005.
europa.eu.int/comm/enterprise/ecodesign/,
4 The Material Systems Laboratory at Massachusetts Institute of Technology has studied this
area extensively. Researchers include Erica Fuchs, Michael Johnson, Francisco Veloso.
5 US Food and Drug Administration, 2005, www.fda.gov/opacom/hpview.html,
2005.
accessed June 1,
6 US Consumer Product Safety Commission, 2005, www.cpsc.gov/, accessed June 1, 2005.
7 EU, "Directive on the Restriction of Hazardous Substances," 2003,
europa.eu.intleur-lex/pri/en/oj/dat/2003/1_037/1_03720030213enOO190023.pdf,
2005.
accessed June 1,
8 Walls, Margaret, "The Role of Economics in Extended Producer Responsibility: Making Policy
Choices and Setting Policy Goals," Resources for the Future, Discussion Paper 3/11, 2003,
available at
www.rff.org/Documents/RFF-DP-03-1 I.pdf, accessed May 28, 2005.
9 EU, "Directive on Packaging and Packaging Waste," 1994,
europa.eu.int/scadplus/leg/en/lvb/121207.htm, accessed June 1, 2005.
10
More information about Germany's 'Green Dot" Dual System for recycling packaging waste
may be found at www.gruener-punkt.de, accessed June 1, 2005.
1I Toffel, Michael, "The Growing Strategic Importance of End-of-Life Product Management,"
California Management Review, 45/3, (2003): 102-129.
Environmental Tax Policy Institute, www.vermontlaw.edu/elc/index.cfm?doc_id=134,
May 17, 2005.
12
accessed
Resources for the Future provides a sampling of references that address environmental taxes
as an introduction to this subject area. www.rff.org
13
Boyd, James, "Green Money in the Bank: Firm Responses to Environmental
Responsibility," Magagerial and Decision Economics, 18/6 (1997): 491-506.
14
1'5Snir, Eli, "Liability as a Catalyst for Product Stewardship." Production and Operations
Management, 10/2, (2001): 190-207.
16
Snir, 2001.
17
GreenTech Assets, Inc., greentechassets.com/, accessed May 31, 2005.
48
Financial
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
18
Ashland, Inc., www.ashchem.com/adc/enviro/,
19
Snir, 2001.
accessed May 31, 2005.
20 Boyer, Marcel and Porrini, Donatella, "The Choice of Instruments for Environmental Policy:
Liability or Regulation?" An Introduction to the Law and Economics of Environmental Policy:
Issues in Institutional Design, Research in Law and Economics, 20 (2002): 1-41.
Roberts, J.A., "Green consumers in the 1990s: profile and implications for advertising," Journal
of Business Research, 36/1, (1996): 217-231.
21
Mohr, Lois A., Eroglu, Dogan, Ellen, Pam E., "The development and testing of a measure of
skepticism toward environmental claims in marketers communications," The Journal of Consumer
Affairs, 32/1, (1998): 30-56, referenced in Hoffman, Andrew, "Business Decisions and the
Environment: Significance, Challenges, and Momentum of an Emerging Research Field," in G.
Brewer and P. Stern (eds.) National Research Council, Decision Making for the Environment:
Social and Behavioral Science Research Priorities, 2005.
22
Hansen, Nannette, "Organic food sales see health growth," MSNBC News Online, December,
3, 2004, msnbc.msn.com/id/6638417/, accessed May 20, 2005.
23
US Environmental Protection Agency, Energy Star Program, 2005, www.energystar.gov/,
accessed June 1, 2005.
24
25 Daley, Beth, "Eco-products in demand, but labels can be murky," Boston Globe, February 9,
2005.
26 Atkinson, William, "Demand for green solvents will boom," Purchasing Magazine Online,
October 10, 2002, www.purchasing.com/article/CA250861.html,
accessed May 20, 2005.
27 Roberts, Sarah, "Supply chain specific? Understanding the patchy success of ethical sourcing
initiatives," Journal of Business Ethics, 44/2, (2003): 159-170 referencing the Environics
International, CSR Monitor Survey, Millennium Poll,1999.
28
Roberts, 2003.
Connor, Tim, "Still Waiting for Nike to Do It," A Global Exchange Report, 2001,
www.globalexchange.org/campaigns/sweatshops/nike/stillwaiting.html,
accessed June 5, 2005.
29
Puckett, Jim, et al, "Exporting Harm: The High Tech Trashing of Asia," A Silicon Valley Toxics
Coalition Report, February 2002, www.svtc.org/cleancc/pubs/technotrash.pdf,
accessed June 5,
2005.
30
31 US Environmental Protection Agency, "The Lean and Green Supply Chain: A Practical Guide
for Materials Managers and Supply Chain Managers to Reduce Costs and Improve
Environmental Performance," EPA 742-R-00-001, 2001.
Porter, M., van der Linde, C., "Green and Competitive: Ending the Stalemate,"Harvard
Business Review, 73/5, (1995): 120-134.
32
49
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
The Toxics Use Reduction Institute offers numerous case studies that demonstrate
environmental and financial savings through pollution prevention activities.
www.turi.org/content/content/view/full/1879/,
accessed May 31, 2005.
33
34
US EPA, uLeanand Green....," 2001.
Todd Wilkerson's presentation may found on the website of the Supply Chain Council,
www.supply-chain.org/site/files/Wilkerson_LMl_SCWNA03.pdf,
accessed April 2, 2005.
35
Geyer, R., Jackson, T., "Supply Loops and Their Constraints: The Industrial Ecology of
Recycling and Reuse," California Management Review, 46/2, (2004): 55-73.
36
37 Kura, Y., Revenga, C., Hoshino, E., Mock, G., uFishing for answers: making sense of the global
fish crisis," World Resource Institute Report, 2004,
pubs.wri.org/pubsdescription.cfm?PublD=3866,
accessed May 30, 2005.
38
Kura, et al, 2004.
Unilever's annual report describing efforts to build and sustain reliable fish supplies is available
at www.unilever.com/ourvalues/environmentandsociety/default.asp,
accessed May 5, 2005.
39
40
United Nations Environmental Program, uVital Graphics: An overview of the State of the
World's Fresh and Marine Waters," 2002, www.unep.org/vitalwater/, accessed May 30, 2005.
41
Morrison, J., Gleick, P., "Freshwater Resources: Managing the Risks Facing the Private
Sector," A Research Paper of the Pacific Institute, 2004,
www.pacinst.org/reports/business_risksofwater/,
accessed May 30, 2005.
50
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
3. Supply Chain Environmental Excellence
P
An excellent supply chain response to environmental pressures involves a
distinct operating model, objective, and processes.
In order to characterize how industry may best respond to environmental pressures through their
supply chains, it is important to understand the role supply chain management plays in supporting
business strategy. Given that "ample evidence exists to support the premise that supply chain
management processes have a significant impact on the operational and financial performance of
companies," it is appropriate to ask what constitutes a supply chain that successfully brings value
to a company.' In a working paper that forms the basis for the Supply Chain 2020 research
initiative at Massachusetts Institute of Technology, a four statement hypothesis defining an
'excellent supply chain" is proposed. "An excellent supply chain:
*
enhances and is an integral part of a corporation's business strategy;
·
leverages a distinctive operating model to gain competitive advantage;
*
executes well against a balanced set of operational objectives or metrics; and
*
focuses on a small number of best business processes that are aligned with objectives."
Chapter three further examines this hypothesis with respect to environmental excellence. It
introduces a number of processes within each basic function of supply chain management that
improve environmental performance and concludes with a discussion of how corporations may
begin to develop processes within a context of environmental pressures and market drivers. The
supporting content for this chapter was drawn primary from environmental management literature.
3.1 Integral part of strategy
First, if an excellent supply chain is considered an integral part of a corporation's business
strategy, then it should also be integral to a corporation's environmental strategy. Supply chains
operationalize the existing linear cycles of industrial production, and represent the cumulative
environmental impacts of a product from extraction to final delivery. It is reasonable to believe
that if a company has an environmental strategy, then that strategy would be implemented
through activities at the supply chain level. Many companies have exhibited a commitment to the
natural environment through corporate responsibility statements in marketing publications and on
the internet. One may evaluate whether or not these companies' supply chains are enhancing or
undermining their stated environmental positions.
51
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
3.2 Distinct operating model
Second, an excellent supply chain should leverage a distinctive operating model to gain
competitive advantage. An operating model defines an organization's overall strategy for
business, and may be reduced commonly to simple statements like "to offer the lowest priced
products" or "to provide the largest selection of products." Supply chains either support the
designated operating model, effectively coordinating supply channels and production activities, or
they do not.
A supply chain may also leverage a distinctive operating model with respect to environmental
pressures. Although environmental activities are typically regarded as ancillary to business
operations, under ideal circumstances, these activities are aligned with and augment the core
operating model. Regardless of whether or not this alignment exists, as environmental pressures
increase and require action at the supply chain level, a company must choose 1) to operate
beyond environmental pressures, 2) to operate at environmental pressures, or 3) to resist
environmental pressures.
Figure 3.1: Environmental operating models
*e
This categorization of environmental operating models is not a new concept. Several researchers
have described various corporate environmental orientations in a similar way. R. Kopicki presents
three approaches in environmental management: the reactive, proactive, or value-seeking. 2 ' 3
Steve Walton offers a comparable model in characterizing the purpose of environmental activity
as either "comply with the letter of the law," "clean up," or "be proactive."4 Robert Klassen
describes the continuum of behavior from reactive to proactive orientations in several
publications. 5 Ad de Ron designates environmental strategy as following, market-oriented, or
sustainability-oriented.
6
Finally, Paul Murphy introduced a survey tool that classifies companies
across industries as environmental progressives, moderates, or conservatives. 7 It is important to
note, however, that these categorizations of corporate environmental orientation focus primarily
on behavior within the facility, as opposed to articulating a product-focused supply chain
52
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
response. Also, they do not explicitly identify the different sources of environmental pressure regulations, consumers, and resources - in recognition of the fact that it may be advantageous to
operate beyond pressure for one and at pressure for others. Despite this more limited view and
slight difference in descriptive terms, it is generally agreed that environmental and core business
activities are best when mutually supportive. Accordingly, an excellent supply chain should
leverage a distinct operating model that is informed by environmental pressures to gain
competitive advantage.
3.3 Balanced operational objectives
Third, an excellent supply chain executes well against a balanced set of operational objectives or
metrics. Classic supply chain objectives are described by the Supply Chain Council to Include
reliability, responsiveness, flexibility, cost, and asset utilization. 8 A "balanced set" may include
only one or two of these operational objectives depending on the designated operating model.
For instance, a corporation may focus on supply chain efficiency and may employ metrics such
as line-items-picked-per-hour
or cash-to-cash-cycle-time to indicate performance. With regard to
the environment, operational objectives may be developed for each environmental operating
model in response to each type of environmental pressure as follows:
Figure 3.2: Environmental operational objectives
environmental pressures
r
en
.5E
CD)
EL
g
>~~~
Resources
Regulations
Markets
Operate beyond
pressure
Substitute
Expand
Obviate the need for
Exceed
Drive
Create
Operate at pressure
Conserve
Comply
Meet
Satisfy
Breach
Relocate
Exit
Ignore
Secure
Resistpressure
Suppose a corporation elects to operate at regulatory pressure. This corporation's operating
objective, therefore, is to comply with all regulatory directives that affect its activities with the least
disruption to other business processes. Metrics such as number-of-non-compliance-incidents,
fines-for-non-compliance
or
may be selected to indicate direct environmental performance. Metrics
53
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
such as cost-to-compliance and time-to-compliance may be used to indicate efficiency and
environmental performance. A large body of research discusses the application of metrics to
indicate direct environmental performance, such as energy use or total waste generated. 9 An
interesting extension of this research involves the development of metrics to indicate
environmental performance of an entire supply chain.10
Figure 3.2 presents a useful framework for examining industry environmental activity at large.
Proponents of corporate environmental initiatives may argue that a proactive orientation
.operating
beyond environmental pressures" is the best way to protect the natural environment
and sustain long-term value and profitability. However this framework suggests that
environmentally-aware supply chain excellence may be achieved within each operating model. In
this sense, excellence may perhaps rely on three conditions: 1) environmental pressure is
effectively signaled to the company, 2) there is sufficient time to respond to the pressure, and 3)
the company has adequate management and technological capability to implement a response at
the supply chain level. A company that is reactive, flexible, and efficient in execution may operate
extremely well at environmental pressure, while a company that is proactive, innovative, and
differentiated from competition may best place themselves beyond pressure. The operating
model decision may be further determined by market conditions and product attributes.
3.4 Best business processes
Fourth, an excellent supply chain focuses on a small number of best business processes that are
aligned with operational objectives. While comprehensive supply chain management may require
hundreds of processes to be performed n a structured manner, the greatest operational and
financial benefits result from concentrated efforts on a relatively small number of unique business
processes. The same may be said about environmental benefits: an excellent supply chain with
respect to environmental performance focuses on a small number of processes that are aligned
with environmental operating objectives.
During the past decade, best business processes have typically included cross-functional
processes, extended or inter-enterprise processes, the use of formal optimized decision-making,
the use of stochastic decision-making, and the use of risk management.:
Interestingly, the vast
body of environmental management literature echoes these themes, encouraging many of the
same approaches in developing processes to improve environmental performance. Accordingly,
concepts proposed by environmental management literature may be understood and effectively
applied to the context of supply chain management.
54
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Figure 3.3: Basic supply chain management functions
Company A
functions of Companv A
Basic suppyIVchain manager nment
I
f
_
P.
Consider environmental processes arranged by the most basic functions of supply chain
management as defined by the SCOR model:
3.1.1 Plan
The chief variables that influence the environmental performance of a product or system are
determined during the planning phase. A number of processes may be used to aid environmental
decision-making while planning the supply chain.
Environmental cost accounting.1 2
Environmental cost accounting is a technique to identify and assign discrete costs to
environmentally harmful activities within a broader system. The term "cost" as used implies two
meanings. The first is the monetary cost that an individual company might incur from a specific
activity, such as the fees associated with hazardous waste disposal. The second is the cost of
damage to human health or the natural environment that may be directly attributed to a corporate
activity.
Companies motivated to reduce operating costs or to demonstrate an environmental
commitment use environmentally accounting techniques to capture environmental costs not
typically captured through conventional accounting methods. The US EPA commissioned a
comprehensive study of the use of environmental accounting in hospital purchasing and waste
management in the year 2000, which serves as an excellent reference about accounting
techniques.
*
13
Environmental life cycle analysis.
Environmental life cycle analysis is a method used to identify and evaluate the environmental
impacts associated with a product or service throughout its entire life from material extraction to
eventual disposal and assimilation into the environment. As opposed to environmental cost
accounting, life cycle analysis implies non-monetary environmental assessment and is used as a
55
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
product or system design tool. A number of life cycle analysis methodology books and software
programs are available,1 4 although not specifically geared to supply chain managers.
*
Design for environment
Design for environment is an approach to reduce the environmental impacts of a product by
introducing specific design criteria during the product development phase, such as "design for
recyclability" or "design for energy efficiency." Once the environmental impacts of a particular
product characteristic or life-cycle phase are identified through a formal or informal analysis,
design for environment may be used as an organizing design principle to ameliorate those
impacts. Many industries have successfully implemented a design for environment approach in
product development. For instance, appliances that have been awarded Energy Star rating by the
US EPA are designed to meet specific energy efficiency criteria, 15 and Kodak "Fun Saver" oneuse-cameras are designed to be disassembled and remanufactured into new cameras.16
3.1.2 Source
Sourcing professionals may consider the environmental attributes of materials, components, and
products, as well as the environmental performance of the suppliers' direct activities using the
following processes.
·
Environmental auditing.
Environmental auditing is a procedure to verify the environmental performance of a material,
component, product, or facility. Auditing may be conducted by a third-party organization or the
buyer in accordance with previously established environmental guidelines. Many multi-national
companies, including Limited Brands, Inc., Texas Instruments, and General Motors have
designated standards and routinely audit suppliers for environmental performance.'
7
Internal
auditing is also widely promoted as part of the ISO 1400018 environmental management
standards.
*
Environmental certification.
Environmental certification is a guarantee that a product or facility meets environmental standards
defined by a third party. Certification typically involves product labeling for consumer marketing in
response to regulatory pressures or consumer demands for products with improved
environmental attributes. Examples of prevalent certification programs Include Green Seal' 9,
Germany's Blue Angel2 0, Certified Organic,21 and the building industry's Leadership in Energy
and Environmental Design certification 2 2. Companies may undergo environmental certification for
their own products or seek to purchase certified products.
3.1.3 Make
As discussed earlier, the manufacturing response to facility-focused regulatory directives has
evolved from end-of-pipe pollution control to the implementation of environmental management
56
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
systems. It may be expected that this evolution will continue domestically and extend to facilities
in regions with weaker regulatory regimes, involving the following processes:
Pollution prevention.
Pollution prevention is an approach to preemptively identify and alter activities that create waste.
Prevention techniques including substitution, product modification, improved maintenance, and
recycling have been successfully applied at several facilities following the Pollution Prevention
Act of 1990 and several state-level regulatory directives. The Journal for Cleaner Production2 3
and the Pollution Prevention Resource Exchange2 4 serve as excellent references on this topic.
*
Environmental management systems.
Environmental management systems are sets of processes that enable an organization to
identify, monitor, and address the environmental impacts of its activities. Systems typically
include guidance for employees in environmental health and safety procedures and facilitation
tools for continual improvement of environmental performance. While developing an
environmental management system does not guarantee better environmental performance, it
generally helps companies comply with regulations and manage risk more consistently and
effectively. While ISO 14000 serves as the international standard for environmental
management, the US EPA also provides several good references to develop a system
independently. 2 5
3.1.4 Deliver
The environmental implications from transportation are growing, as materials, components, and
finished products travel longer distances through production and distribution cycles. The total
impact of delivery functions correlates to two variables that logistics professionals manage
directly: transportation distance and mode.
"Green" logistics.
Green logistics is an approach that considers the environmental impacts of procurement,
transport, inventory control, and distribution activities along with other considerations in order to
minimize environmental costs. For example, in addition to considering monetary cost, time, and
reliability of freight service, one may also consider the volume carbon dioxide emissions. There
are several Interesting studies that compare the environmental impacts of various product
distribution systems, including online retail models.2 6
3.1.5 Return
Return processes are gaining in strategic Importance as companies compete further to better
serve customers, recover assets, minimize liability, and meet extended producer responsibility
regulatory requirements.
·
Reverse logistics.
57
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Reverse logistics is a set of activities to collect, transport, and manage products and materials
after sale and delivery to the customer. Reverse logistics has been typically used to facilitate
unsold product and warrantee returns, and it is being further developed to address "take back"
regulatory obligations and to pioneer concepts of closed-loop supply chains. This subject
represents an important area of emerging research within supply chain management. 2 7
a
Remanufacturing.
Remanufacturing is a process to clean, repair, and restore used durable products to good
condition for resale. Remanufacturing is typically integrated with reverse logistics processes
because valuable products and components must be appropriately transferred from the consumer
to the manufacturer. In addition to logistical challenges, remanufacturing involves serious
technical, planning, and inventory management challenges, areas which are increasingly
explored in practice and research literature.2 8
*
Recycling
Recycling is a procedure to reuse materials, which may otherwise be considered waste, in a form
other than primary use. Recycling is facilitated by return processes in part because existence of a
secondary market depends on the quality of recycled materials. Whether recycling recovered
materials or using purchased recycled content in production, processes require additional
planning due to fluctuations in material timing and availability.
This list is by no means exhaustive or prescriptive. Rather, it provides an overview of the many
business processes that could yield significant environmental improvements while being
conscious of the impact on corporate strategy. While comprehensive supply chain management
may require hundreds of processes to be performed in a structured manner, the greatest
operational and financial benefits may result from concentrated efforts on a relatively small
number of business processes. Although many would argue that true environmental excellence
is a product of the holistic integration of many processes, the previous statement likely holds true
for environmental performance as well. Concentrated efforts on even one of the processes
described above may yield significant environmental benefits for the company. The focused
innovation applied on one process may also yield environmental benefits and behaviors that
ripple through the supply chain.
58
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
3.5 Summary
Environmental pressures add a new element of complexity to supply chain management,
requiring a comprehensive response involving environmental operating models, operational
objectives, and new supply chain processes.
In order to develop processes that both advance
environmental goals and support corporate strategy, a framework for supply chain environmental
excellence should be used. This framework allows corporations to use environmental activities to
position themselves strategically and consider how best to develop supply chain processes that
may confer competitive advantage.
59
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
1 Lapide, L., "Supply Chain 2020 Project- Phase 1 Excellent Supply Chains: Working Hypothesis
and Research Plan," Center for Transportation and Logistics, Massachusetts Institute of
Technology, July 2004, available at www.supplychain202.net, accessed June 7, 2005.
Hoek, Remko I. van, From reversed logistics to green supply chains," Supply Chain
Management, 4/3, (1999): 129-136.
2
3 Kopicki R.J., M.J. Berg, L. Legg, V. Dasappa and C. Maggioni, "Reuse and Recycling: Reverse
Logistics Opportunities," Council of Logistics Management, 1993, referenced in Hoek, 1999.
4 Walton, S.V., Handfield, R.B. and Melnyk, S.A., "The green supply chain: integrating suppliers
into environmental management processes", International Journal of Purchasing & Materials
Management, 34/2, (1999): 2-11, referenced in Hoek, 1999.
5 Klassen, R.D., Johnson, P.F., "The Green Supply Chain," in Westbrook, R., New, S., (eds.),
Understanding Supply Chains: Concepts, Critique and Futures, Oxford University Press, 2004.
Ron, Ad J. de, "The ultimate result of continuous improvement," International Journal of
Production Economics, 56-57, (1998): 99-110
6
7 Murphy, Paul R., Poist, Richard, F., Braunschweig, Charles D., "Green Logistics: Comparative
Views of Environmental Progressives, Moderates, and Conservatives," Journal of Business
Logistics, 17/1, (1996): 191-211.
8 Supply Chain Council, Supply-Chain Operations Reference Model, SCOR Version 7.0, available
at www.supply-chain.org, accessed May 28, 2005.
9 Gregory J., Atlee J., Isaacs J., Kirchain, R., "Sustainability metrics for materials use at the
system and operational level," Materials Systems Laboratory discussion paper, 2004.
0 See Clift, R., "Metrics for Supply Chain Sustainability," Clean Technologies and Environmental
Policy, 5/3-4, (2003): 240-256, and Mcintyre, K., et al, "Environmental Performance Indicators for
Integrated Supply Chains: the Case of Xerox Ltd.," Supply Chain Management, 3/3, (1998): 149160.
1 Lapide, 2004.
The US Environmental Protection Agency maintains a website with a number of resources
about the environmental and financial benefits of environmental cost accounting, available at
www.epa.gov/opptintr/acctg/resources.htm, accessed June 2, 2005.
12
13 Shapiro, K., Stoughton, M., Graff, R., Feng, L., "Health Hospitals: Environmental Improvements
through Environmental Accounting," A Report from Tellus Institute, July 2000, available at
accessed June 1, 2005.
www.epa.gov/opptintr/acctg/pubs/hospitalreport.pdf,
14
Among the most recent books published about life cycle analysis is The Hitch Hiker's Guide to
LCA by Henrikke Baumann and Anne-Marie Tillman, published in 2004.
15Energy Star designates product specifications and eligibility criteria for several categories of
products, summarized at www.energystar.gov/index.cfm?c=products.preshome_office,
accessed June 1, 2005.
60
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
16 Kodak's One-use Camera Recycling Program, www.kodak.com/eknec/PageQuerier.jhtml?pqpath=2/3/9/1026/1032&pq-locale=en_US,
accessed June 1, 2005.
17
Data is based on conversations with individual companies and online information.
International Organization for Standardization, www.iso.org/iso/en/iso9000-14000/index.html,
accessed June 2, 2005.
18
19Green Seal Product Certification, www.greenseal.org, accessed June 1, 2005.
Germany's Blue Angel Certification, www.blauerengel.de/englisch/navigation/body_blauerengel.htm,
20
21
accessed June 1, 2005.
Certified Organic Food Standards, www.ams.usda.gov/nop, accessed June 1, 2005.
Leadership in Energy and Environmental Design is a national rating system to certify green
buildings, administered by the US Green Building Council, www.usgbc.org/LEED/, accessed June
22
1, 2005.
23
The contents of the Journal for Cleaner Production is available at
www.elsevier.com/wps/find/journaldescription.cwshome/30440/description#description,
accessed at June 1, 2005.
24
Pollution Prevention Resource Exchange, www.p2rx.org, accessed June 2, 2005.
The US Environmental Protection Agency maintains a website with a number of resources and
case studies about environmental management systems, available at
www.epa.gov/ems/resources/index.htm,
accessed June 2, 2005.
25
Matthews, H. Scott, Hendrickson, Chris T., "Economic and Environmental Implications of
Online Retailing in the United States," Joint OECD/ECMT Seminar on the Impact of E-commerce
on Transport, Paris, June 6, 2001.
26
Among the most cited books about reverse logistics is Goina Backwards: Reverse Logistics
Trends and Practices by Dale S. Rogers and Robald S. Tibben-Lembke published by the
Reverse Logistics Executive Council in 1999. Full text of this work is available online at
http://www.rlec.org/reverse.pdf, accessed June 3, 2005.
27
Guide Jr., V.D.R., and Van Wassenhove, L.N., "Business Aspects of Closed-Loop Supply
Chains," in Guide Jr., V.D.R., and Van Wassenhove, L.N., eds., Business Aspects of ClosedLoop Supply Chains, Carnegie Mellon University Press, (2003): 17-42.
28
61
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
4. Reverse Supply Chain and the Environment
Processes must be developed within a context.
While comprehensive supply chain management requires hundreds of processes to be performed
in a structured manner, the greatest operational, financial, and environmental benefits may result
from concentrated efforts on a relatively small number of unique business processes. In order to
confer competitive advantage, companies should focus on developing processes within areas of
core competencies and within the context of environmental pressures and market drivers. For
example, return processes serve as the functional building blocks of reverse supply chains, which
many consider to be the "final frontiers of supply chain management."' Distinct return processes
may be leveraged by companies to better serve customers, recover valuable material assets,
minimize liability, and meet evolving environmental requirements. However, these processes will
contribute to both corporate profitability and environmental protection only when managed
appropriately for the context within which a firm operates.
This chapter explores the importance of context by examining the emergence of reverse supply
chains in direct response to environmental pressures within the electronics industry. The chapter
is organized into two sections. The first section introduces various types and operational
dimensions of reverse supply chains. The second section focuses on the electronics industry. It
describes the unique environmental pressure posed by evolving
take-back" laws in Europe and
the United States, which require that manufacturers assume responsibility for products at the end
of their useful lives for recycling and disposal. It compares the activities of leading electronics
companies, and outlines the trends, challenges, and strategic considerations that define the
industry response. In this case, processes are shaped by a broad context of regulatory,
behavioral, and economic market drivers.
As noted in the corresponding citations, the information presented in this chapter was collected
from research literature and direct semi-structured interviews with representatives from eight
global consumer electronics companies. The companies include Hewlett Packard, Motorola, Dell,
Philips, and leading television and computer equipment manufacturers. These companies were
selected because of their involvement with the MIT Supply Chain 2020 research initiative and
participation in national electronics meetings hosted by the US Environmental Protection Agency
in order to examine the emerging issues of end-of-life electronics. Each representative was
provided with a questionnaire in advance involving a series of questions about reverse supply
62
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
chain processes and motivations. This questionnaire is shown in Appendix B. Specifically,
company representatives were asked questions about:
·
System financing
*
Collection mechanisms and incentives
*
Transportation
*
Partnerships
*
Management structures
As electronics end-of-life issues are currently managed by individuals with various professional
backgrounds and scopes of work, the interviews were conducted in a semi-structured manner to
focus on each representative's primary area of knowledge. Informal transcripts were shared after
the interview to allow for clarifying comments.
4.1 Understanding reverse supply chains
The Reverse Logistics Executive Council defines reverse supply chain management as "planning,
implementing, and controlling the efficient, cost effective flow of raw materials, inventory, finished
goods, and related information from the point of consumption to the point of origin for the purpose
of recapturing value or proper disposal." 2 Building on this definition, reverse supply chain
management is an integrative approach to recovering a product from a consumer for resale,
reuse, recycling, or disposal.
4.1.1 Reverse supply chain and the environment
Reverse supply chains are heralded by environmentalists as key elements of sustainable
production. In changing the end-point of a company's supply chain from the consumer to the
product's end-of-life or to possibly even the start of a new production cycle, reverse supply chains
present opportunity to extend the use of products, conserve resources, prevent waste, and create
secondary markets and jobs in remanufacturing and recycling. For instance, reverse supply
chains facilitate the collection and recycling of aluminum cans, steel, newspaper, plastics, and
glass - all of which provide material feed-stocks that are produced at 40-95% less energy than
those produced from raw materials and provide approximately 1.1 million jobs in the United
States. 3 Reverse supply chains support the sales of remanufactured products such as re-treaded
tires, which require 70% less oil for production and cost 30-70% less money. 4 Beyond this,
reverse supply chains of the future may operationalize entirely closed-loop industrial cycles, a
notion popularized by industrial ecology research literature5 and popular books such as William
McDonough and Michael Braungart's Cradle to cradle: remaking the way we make things. 6 The
design and operation of reverse supply chains clearly suggests many environmental benefits.
However, to frame the development of reverse supply chains as motivated strictly by environment
63
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
pressures, detracts from the broad implications of reverse processes and the compelling
business case for further development of supporting capabilities.
4.1.2 Types of reverse supply chains
In a 2001 study evaluating reverse supply chain activity in the United States, researchers found
that reverse supply chains are an important and often strategic part of the business mission with
an increasingly large bottom-line impact." This statement is particularly accurate when
considering that companies must accommodate up to four types of product returns supported by
markedly different reverse supply chains: 7
Commercial returns are products that are linked to the sales process. In the United States,
the value of commercial returns is estimated at $100 billion annually. 8 In fact, products
returned directly from the consumer have increased in volume up to 25% of turnover in some
industries because of the growth of online and catalog sales. Also included in this group are
overstock products, recalled products, and products that are returned because they are
broken and under warranty. Commercial returns have various handling mechanisms
depending on the industry and product. The trend in retail is certainly to allow more and more
returns as a guarantee of product quality and enhanced customer service.
·
End-of-use returns include products taken back after some period of operations due to the
end of the lease, trade-in, or product replacement. Common examples of these types of
returns include leased automobiles, carpets, computers, and copy machines. Products with
significant end-of-use returns are generally characterized by high economic value. These
products are less expensive to refurbish than replace and resale to secondary markets
typically creates additional profit for the company's original investment.
*
Packaging returns include a broad range of reusable items that are not part of the
consumable product itself. Such returns include products that are related to the consumption,
use, or distribution of the main product, including containers and pallets, refillable cartridges,
and bottles. There are several motivations to collect packaging returns. In some cases,
manufacturers are motivated to recover and reuse packaging in order to save on disposal
fees or the manufacture of new packaging. In other cases, consumers are motivated by a
deposit scheme to return packaging to a redemption center which s supported by a
secondary market. State bottle bills placing deposits on aluminum cans are good examples of
how to create consumer motivation.
*
End-of-life returns include products with high material value such as automobiles and
appliances, or those taken back from the market at the end of useful life because of some
sort of negative environmental externality. The latter situation is typically driven by regulatory
directives, including products such as car batteries, X-ray film, and a wide-range of electronic
products that are being collected under extended producer responsibility legislation.
64
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
4.1.3 Reverse processes
Each type of return requires a unique reverse supply chain with as many considerations as the
forward supply chain. In fact, reverse supply chains require not just one, but a number of
functional processes that are developed specifically to accommodate returns. These processes
are complex, costly, and should be aligned with overall corporate strategy, operating model, and
operational objectives. Altogether, the design and operation of the reverse supply chain is
considered to be more challenging than the forward supply chain because of the wider range of
products, variable conditions, and networks of users.9
10
Moreover, current legislation is causing
the scope of reverse supply chain management to increase. For instance, the WEEE Directive in
Europe is requiring that almost all electronic products be returned to the manufacturer - a
situation that may require careful process controls to effectively address the inherent range of
products, variable conditions, and networks of users.
Figure 4.1: Return processes
..
....
.:... ..
.
,.
..
...
..
'~
The design and operation of reverse supply chains of all types involve the following processes:
*
Product acquisition
Product acquisition poses the most critical questions in designing the reverse supply chain:
Which products to collect? Where to collect them from? When can they be collected?
Considered the "foundation for operational planning and control activities,"' 1 product acquisition
varies according to product, market, and type of reverse supply chain. There are a number of
different ways that product may be acquired from the consumer. A familiar venue such as
customer service desk may be most appropriate for commercial returns, while a municipality
waste location or redemption center may best accommodate end-of-life returns. In the case of
commercial returns and end-of-use returns, literature suggests that information technology,
including RFID and sensors, is beneficial for controlling the quality and rate of product returns.12
In fact, the more uncertainty s eliminated in the return process, the more a company can plan
65
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
and Implement efficient strategies. Van Nuunen cites companies such as Oce, Bosch, and
Heineken as leaders in using technology to eliminate uncertainty and control the return process to
the firm's benefit. Product acquisition also defines who the players in the reverse supply chain
may be, Including third party logistics providers, retailers, municipalities, or even recycling
partners.
*
Reverse logistics
Reverse logistics is frequently used synonymously with reverse supply chain, but here the term
encompasses the transportation, handling, and facility location processes of reverse supply chain
management. Reverse logistics may be highly complex and costly. A study in 2000 estimated
that reverse logistics for commercial returns accounts for approximately 4% of total logistics
costs. Logistics costs account for approximately 9.9% of the United States economy, so applied
to the GDP, reverse logistics costs for commercial returns amounted to approximately $37 billion
in
1999.13
The natural inclination to combine forward and reverse logistics systems may seem
"appealing, but forward distribution rarely fits reverse logistics needs."1 4 This is because forward
distribution is designed to handle large volumes of the same product from the manufacturer to
customer locations. Return processes typically yield various products, at numerous locations,
and often in low volumes. Final destinations are rarely the original manufacturing site.1 5
Moreover, depending on the nature of the retumrns,handling may be more complicated. Products
will likely be in odd-shaped packaging, if packaged at all. In this sense, they are more "fragile"
and need to be carefully handled. There may be limitations on who is able or licensed to handle
them. In the case of end-of-life returns, regulatory restriction may require special licensing for
various classes of waste. Facilities may be similarly restricted, and there may not be local
destinations for some products. Other products may need to travel long distances to a central
processing facilities.
·
Facilities
Facility processes require another level of consideration and management. Is it worth operating
your own facilities or does it make sense to partner or outsource? Should the facility be colocated with retailers or manufacturing facilities? A 2004 study evaluated a variety of collection
scenarios for end-of-life electronic products, including a "hypothetical
single, large drop-off facility
placed in the center of the service area to a highly distributed set of micro-collection facilities colocated at existing retailers, charities, and municipal facilities."' 6 Results demonstrated that
multiple, convenient collection options faired well because they minimized consumer waiting time
and carbon dioxide emissions from gasoline consumption. Beyond the citing of the facility,
decisions about inspection and sorting activities will be shaped by the final destination of returned
products. What sort of labor or technology is best to separate products and materials for different
purposes? Will these products and materials be distributed for further processing?
66
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
*
Processing
Processing involves various levels of remanufacturing, refurbishment, repackaging, or separating
the most valuable components and materials for resale or recycle. Processing decisions for
returned products may depend on a number of external factors. Is there a secondary market for
reconditioned products? Do reconditioned products, components, or materials create the most
revenue? What technology is needed to process returned products? Thierry et al describe the
benefits and challenges of "several types of processes or operations that characterize product
recovery, such as refurbishing, re-use, and cannibalization.
"7
Gungor and Gupta propose a
categorization of these processes into two main groups of product recovery practice: recycling
and remanufacturing.
Recycling returns materials to a commodity state, where their identity is
lost, and involves operations that might include collecting, sorting, processing, decontaminating,
and disassembly of the materials. In contrast, remanufacturing preserves the basic identity of the
original product, bringing back its functionality to an acceptable level of quality or performance. 18
*
Secondary markets
Secondary markets largely define what is economically feasible for the reverse supply chain. The
sale of a reconditioned product, component, or material may or may not finance the other return
processes. High-quality recycled materials may be profitably processed and sold as a commodity
in existing markets. Reconditioned products such as automobiles and mobile phones may also
be sold to meet the demands of consumers who may not be able to afford newly manufactured
products. Currently, 70% of recovered mobile phones are reconditioned and resold to secondary
markets in Africa, Latin America, India, China, and the United States.19 While the absence of a
robust secondary market removes incentive to develop reverse supply chain processes,
innovative planning and marketing approaches could potentially create demand. Further, it is
interesting to consider how volume affects the viability of secondary markets.
*
Organizational considerations
Organizational considerations include strategy development, management structure, learning,
and performance metrics. Initially, companies must decide to what extent return processes are
going to enhance or support overall strategy. Will managing returned products involve dedicated
staff and objectives? Is it a side activity? Who should manage reverse supply chain processes?
Structured learning about the products that are being returned may not only improve the return
processes, but may inform the design, marketing, and distribution of new products. Consideration
must also be given to performance metrics applied to return processes and reverse supply chain
managers. Performance may be tied to cost of returns, time for processing, or volumes of waste.
A set of environmental metrics may be applied very appropriately here.
67
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Collectively, the processes of reverse supply chain management involve many challenges and
demand technical and organizational innovation to design and operate. These processes present
clear opportunity for leading companies to gain competitive advantage in the return function.
4.1.4 Operating objectives
As described earlier, the operating objective of reverse supply chains should be in line with the
overall operating model and objectives of the business. This statement is complicated by the fact
that a single company may manage several reverse supply chains to accommodate several types
of returns.
Nonetheless, if reverse supply chain processes do not support the overall operating
objectives of the organization, then they will not create value. For example, consider a company
whose operating model is simply "to offer the lowest priced products". In such a case, the reverse
supply chains should be designed for cost minimization. The proper approach to minimizing
costs depends entirely on the type of product and the type of return. With commercial returns, a
central facility and standard operating procedure may minimize costs for one line of products,
while a decentralized approach for quick turn around of time-sensitive products may minimize
costs for others.2 0 With end-of-life returns, a third-party service provider may be able to manage
returns at a far lower cost than internal processes. In all cases, realizing return services at lowest
cost supports the overall operating objectives of the organization, and, thereby, creates value.
4.2 Reverse supply chain response to environmental pressures
Companies that successfully manage reverse supply chains may benefit not only from increased
profitability and customer value, but also from increased capacity to respond to environmental
pressures as they evolve. The following section describes the reverse supply chain response to
environmental pressures within the electronics industry. Though parallel developments have
occurred in other industries, including packaging, construction, and automobiles, electronics
offers a dynamic and timely case study. The industry is characterized by competition and rapid
change, and has benefited broadly from supply chain management innovation.
4.2.1 Attention to end-of-life
As described in Chapter 2, there are four sources of environmental pressures that affect the
supply chain, including consumers, resources, ethical responsibility, and regulations. The
electronics industry, which is among the largest manufacturing industries in the United States, is
generally regarded as relatively clean.21 Nonetheless, because of "the growing importance of the
industry to national economic competitiveness and the increasing recognition that many
,,22
processes used to produce electronic systems do have environmental consequences, " 22 the
industry has proactively addressed a number of environmental issues. In fact, leading companies
have set the standard for other industries in launching extensive environmental programs which
68
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
address issues across the product life-cycle. 23 These issues include workplace health and safety,
material selection, pollution prevention, and perhaps most prominently, product end-of-life. The
intent in this chapter is to explore the processes under development to address product end-oflife because of the obvious and direct supply chain management implications.
Figure 4.2: Product life cycles
Product end-of-life phase impacts the environment.
4.2.2 Concern about end-of-life
Many environmental, trade, and government organizations have published notable reports
detailing the fate and environmental impact of electronics at the end of their useful lives. These
include reports by the Basel Action Network,2 4 the Silicon Valley Toxics Coalition,2 5 National
'26
C.2728
Safety Council,2 6 the US Environmental Protection Agency,27 and several state-level agencies. 2 8
This body of research indicates that there are three primary factors that prompt concern over endof-life electronic products.
Production/Obsolescence
rate.
At the current rate of technology introduction, new models of personal electronic products are
developed and introduced into the market place every 18 to 24 months.2 9 This rate of innovation
drives high rates of obsolescence. Today for instance, nearly 500 million personal computers in
the United States are considered to be obsolete. 30 These and other obsolete electronics will
eventually find their way into disposal systems. Ultimately, this makes electronics the fastest
growing segment of waste.
.
Disposal practices.
In the United States, an estimated 5-15% of computer and electronic equipment is recycled for
material, component, or energy recovery. Between 5-20% is disposed of in landfills, incinerated,
or illegally dumped in the natural environment.
The remaining 75% of personal computer and
electronic equipment is currently stored in private attics, garages, office closets, and
3 1
warehouses.
warehouses.
69
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
*
PRESSURES
Toxicity.
Personal electronics contain various levels of lead, mercury, cadmium, and poly-brominated
flame retardants which are known health hazards. As of 2002, electronic waste accounted for
40% of lead and 70% of mercury and cadmium found within landfills.32 As landfills settle,
chemical and metal leaching into groundwater is common. The incineration of flame retardants in
the presence of copper emits toxic dioxins and furans into the atmosphere. Municipal incineration
is the largest point source of dioxins and heavy metal contamination in the United States.3 3
Together, these characteristics mean that there is real potential for adverse health effects when
electronics are disposed of through conventional means.
4.2.3 Issues with end-of-life
Collectively, these factors create an environmental imperative in need of comprehensive reverse
supply chain processes to remove end-of-life electronics from conventional waste streams.
While remanufacturing and resale may be attractive options for high value equipment, the shortrun economics of a high-technology firm leave little motivation to design and recover most
personal electronics products for future reuse. In this sense, electronic waste represents a
serious environmental externality because the cost of safe and efficient waste management is not
internalized into the price of the product.
Policy-makers, waste management professionals, and electronic manufacturers generally agree
that electronics recycling is the best way to manage existing waste streams. However, the
recovery and recycling of electronic products is no easy task. In fact, there are significant barriers
to the development of wide-scale electronics recycling:
*
Unwillingness to pay.
The general public is either unaware of electronic waste disposal options or unwilling to pay for
appropriate waste management. A recent study from the State of Florida indicates that 81% of
consumers are not even aware you can recycle computers. Further, 64% of those that do know
about recycling options are not willing to pay to have their computer properly recycled.3 4
*
Market.
Recycling is a time, labor, and technology intensive process. The cost of recycling a computer in
the United States was reportedly $0.38 per pound in 1999. 3 5 Added to this cost is the necessary
and highly variable costs of transportation and handling at central redemption centers. Moreover,
the market demand for recycled electronic materials within the United States is inconsistent at
best. Most dramatically, the price for recovered microchips has declined from a height of
between
*
$8 and $14 in 1991 to $0.50 in 1999.36
Lacking infrastructure.
70
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
The increasing volumes of electronic waste may overwhelm existing bulk transport, storage,
processing, and recovery infrastructure. Without a reliable demand for scrap materials, there is
little incentive for private organizations to engage in a lengthy RCRA permitting process for
hazardous waste recycling as described above. Without adequate means to handle electronic
waste, the likelihood of this waste being land-filled, incinerated, or exported to less developed
countries increases.
4.2.4 Regulatory Action
Governments generally turn to regulatory instruments to address the environmental and health
externalities associated with industrial and commercial activities. In the case of end-of-life
electronics, companies have developed a nominal level of recycling services in response to a
combination of liability concerns and economic motivations. Nonetheless, these efforts do not
address the full need. Governments around the globe are calling on the electronics industry to
further address deeper structural, technical, and economic barriers that impede electronics
recycling. The most influential legislative framework is based on the principle of extended
producer responsibility.
Often referred to as "take-back," extended producer responsibility legislation is used to create
incentive for "design for environment" processes that may reduce toxicity and increase
recyclability of electronic products. While this incentive may be the ultimate goal, in practice
today, take-back laws are serving as a regulatory mechanism that forces manufacturers to
develop reverse supply chain processes to reduce the environmental impact and financial burden
of waste management on individual municipalities. In this sense, extended producer responsibility
is in every way a supply chain regulatory directive that requires the development of new
processes such as reverse logistics.
The following section provides an overview of take-back laws both generally and specifically. It is
important to note that over the past five years, laws and regulations around the world are being
proposed, adopted, and evolving at a rapid pace. In order to stay updated on legislative updates,
companies and researchers pay for subscription services such as those maintained by the
Electronics Industries Alliance and Raymond Communications, Inc.37 In fact, trade journals and
reports seem to be the best sources of current information and industrial case studies.
In general, extended producer responsibility may take many regulatory forms. Researcher
Michael Toffel explains that legally imposed producer responsibilities vary according to the
following elements 38:
·
Type of responsibility: economic, physical, informational, or liability;
71
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Product recovery stage: economic or physical responsibility may occur at various stages of
*
end-of-life. For instance, do manufacturers take responsibility as the product leaves the
household or once the product is collected and returned to a central location?
Recovery or recycling targets: targets may designate recycling or recovery according to %
•
mass, % revenue, market share, among others;
Historic waste: legislation may also assign responsibility for historic waste which could be
·
products produced before regulations take affect or products produced by companies that are
no longer in business;
*
Individual or collective responsibility: system may designate manufacturers responsible for
only their own products or a portion of all products collectively.
Figure 4.3: Global take-back legislation in 2005
,
,....,
....
!= No regublation
.;;I
E Regulationunder daelop r.mant
..-..E
I
a ".i_'
J1F
/1
RegulatlonImplemented
.....
A
'f
,,0111
"R."...~'1.~ 4:.~
,.10
; ...
Credit: Philips Consumer Electronics, 2005
While a number of variables influence the viability of reverse supply chain processes, the nature
and extent of regulatory requirements is a key factor. Government decisions about recovery
targets and historic waste for instance may dictate whether or not return processes are profitable.
To this end, it is critical for leading companies to stay aware of change and actively involved to
the extent that they can be with developing legislation.
72
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
4.2.5 Focus on Europe
The European Union's Directive on Waste of Electrical and Electronic Equipment (WEEE) 39 is the
most prominent and extensive "take back" legislation enacted to date. The directive essentially
provides a uniform framework for the development of national regulatory requirements within
each of the European members states. WEEE "defines, prescribes actions, and sets regulatory
milestones for the collection, treatment, recovery, and financing for electrical and electronic
equipment."
40
WEEE originally covered ten product categories, including large household appliances, small
household appliances, information and telecommunications equipment, consumer electronics,
lighting, electronic tools, toys and sports equipment, medical devices, monitoring instruments and
automatic dispensers. As national regulations are developed, the requirements continue to
evolve. For instance, medical devices are now exempt from requirements. New products must
be marked with "do not trash" symbols and information on product disassembly must be provided.
Manufacturers and importers of these products may address their financial responsibilities for
recycling and disposal either individually or collectively based on market share. The costs
associated with the processing of "orphaned waste" or products that reach market before the
August 13, 2005 program commencement will be shared by all manufacturers at the time those
costs are incurred. Products put to market after commencement may not include a visible fee to
fund recycling efforts. The Directive also designates specific recovery and recycling targets
ranging from 50-80 percent for each product category. Initial recovery targets must be met by
December 31, 2006.4
Although some member states are delaying implementation of national regulations, WEEE has by
now sparked an abundance of activity among manufacturers, consultants, and third party logistics
and processing service providers. Researcher Alan Scroope describes the supply chain
response to WEEE as a network management problem. "Ensuring WEEE compliance entails
managing the collection of products via licensed carriers, and the coordination of sorting and
disposing of products within authorized facilities. It also includes managing the resale of products
42
to ensure the highest recovery rate and tracking treatment through certified recyclers." ,42
This statement hits on one of the biggest points of contention in the EU, relating to the issue of
operational choice. National WEEE requirements vary according to country and industrial sector.
Some countries, including Sweden, Norway, Belgium, and Switzerland require all manufacturers
to use a national take-back scheme with little operational flexibility. While some electronics
manufacturers openly support such national schemes because it nominally lowers administrative
costs, others see them as a barrier to free-market competition and the development of cost-
73
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
effective services. In fact, some companies have partnered to form a consortium to establish
branded take-back schemes using privately-contracted third-party logistics and processing
services. A prominent consortium is the European Recycling Plafform, co-founded by Braun,
Electrolux, Hewlett Packard, and Sony. The following section details findings from case
interviews regarding how different European companies see this issue and how it effects their
reverse supply chain processes.
Case study on practices in Europe
An assessment of implementation strategies in Europe illustrates the complexity and learning
involved with developing reverse supply chains under regulatory environmental pressure.
Leading companies may generally be divided into two groups - namely those advocating
independent action and those who prefer a government-endorsed collective. Even companies
that have demonstrated significant environmental leadership disagree on the most basic
approach to compliance. Two firms, Philips and Hewlett Packard, which were both interviewed,
expressed particular preferences regarding this issue and are representative of the two
perspectives.
Table 4.1: A summary of opposing approaches to compliance in Europe
Philips
43
HP Europe
44
Motivation
Compliance, environmental leadership,
brand value
Compliance, environmental leadership,
brand value
Cited challenges
Compliance with national requirements,
cost
Compliance with national requirements,
cost
Leadership
Active in working with European
Parliament to develop amendments
through commenting and committee
work
Driving service competition and
compliance uniformity through the cofounding of the European Recycling
Platform
Product Acquisition
Municipalities
Municipalities
Reverse logistics
Uses local, price-competitive logistics
providers
Contracts to 2 centralized logistics
providers through ERP
Processing
Uses local, price-competitive
processing services
Logistics providers manage processing
Financing
Favors the visible fee and collective
responsibility for historic and orphaned
waste
Opposes visible fee and collective
responsibility for orphaned waste.
Supports individual insurance and
financial guarantees
Partners
Joins competitors in collective national
systems
Joins non-competitors in the ERP
74
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
It is worth understanding why Hewlett Packard strongly and publicly supports the European
Recycling Platform. Launched at the end of 2002, the mission of the ERP is "to ensure the cost
effective implementation of the WEEE Directive for the benefit of participating companies and
their clients."4 5 This launch was motivated by two primary concerns: 1) the desire to increase
competition, and 2) the desire to encourage uniformity.
HP aims to promote a competitive market for collection and recycling services in all European
countries. Based on their direct experiences with the Green Dot system in Germany, HP asserts
that competition will keep costs low: "In 1995, when there was one solution, we were paying
approximately $350E/ton. Now there are six competitors to the Green Dot system and we pay
$70E/ton." Competition will also improve the availability and quality of services: "When we first
formed the European Recycling Platform, we had trouble finding service providers who could
address the requirements of WEEE in all member states for us. We are driving the market in this
area. Our vision for 2012 is that there will be four or five European Consortium systems
competing in all 25 countries."
National WEEE requirements vary according to country and industrial sector. Tracking and
managing the operational requirements of 25 national systems is costly. HP feels that the
consortium offers uniformity in the ability to administer on a "pan-European" basis: "We
commissioned a study in 2004 to investigate whether or not this solution would be the most costeffective. Findings indicated that if a single consortium could provide compliance services across
Europe, participating members would save 70-80% overhead costs." Uniformity also allows
savings in other ways: "The larger geographic expanse would also allow greater economies of
scale resulting in reduced operating costs of 30% and the system would increase competitive.
pressure to all compliance national schemes.4 6"
On the other hand, Philips supports national collective systems and pursues local, pricecompetitive services in each country. Although Philips was not asked specifically about the ERP
or their views about "pan-European" approaches during the interview, it may be concluded that
Philips is a company that draws value from maintaining a strong local presence. Philips has been
very active in working with European Parliament through commenting and committee work since
the onset of discussion about how to apply extended producer responsibility in Europe. No doubt
their efforts in this work reflect a corporate level strategic approach.
75
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
4.2.6 Focus on the United States
Consumers in the United States dispose of 2 million tons of electronic waste each year, Including
50 million computers and 130 million cell phones. The International Association of Electronics
Recyclers has predicted that by 2010, Americans will be disposing 400 million electronic products
annually.4 7 As such, end-of-life electronics present a concern as significant for the United States
as elsewhere. Today, there is a functioning albeit small recovery system in the United States,
which s driven by corporate social responsibility efforts, liability concerns, and to a lesser degree,
profit.
Cellular phones provide a good example of profit-motivated reverse supply chains. Approximately
70% of cellular phones that are collected from consumers are refurbished and resold in
international and domestic secondary markets. The total costs of refurbishing cell phones ranges
48
from $15-30 per phone, while the resale price reaches $40-50 per phone. The revenue from
these sales covers the costs of recycling phones that cannot be refurbished and results in net
profit. Although the existence of the secondary market makes these return processes attractive
to manufacturers and third party recyclers, less than 5 million cell phones are collected from
49
Collection is both the
consumers from a total stock of approximately 130 million each year.
most expensive and the most challenging aspect of the cellular phone reverse supply chain in the
United States.
50
Table 4.2: Cost comparison for recovery of cellular phones and personal computers
Cost (USD)
Cellular phone
Personal computer
Collection
6.00
23.50
Transportation
0.35
0.43
Sorting
-
3.50
Dismantling
0.03
2.75
Refining
0.32
7.87
Non-hazardous waste disposal
0.01
0.83
Hazardous waste disposal
0.03
5.00
Leading manufacturing companies and cellular service providers are highly motivated to collect
phones from customers. Given that cellular phone recovery is currently a net positive or neutral
endeavor, companies can leverage collection initiatives in a number of ways. Initiatives may
serve as a foundation for corporate social responsibility programs. Collection demonstrates
environmental leadership. Refurbishment and resale of cellular phones provide revenue and
product that may be donated to charity. Potential revenue may also support other in-house
environmental programs or recycling of other types of equipment. As one manufacturing
76
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
company explained, "The primary motive for recycling and collection lies in our overall philosophy
of being a leading environmental company. Part of our logistics chain involves take back of not
only phones, but networking equipment, accessories and batteries."5 1 Initiatives also present
opportunities to reduce liability concerns, market directly to customers looking for new phones,
conduct product research, and participate in conversations with legislators about future regulatory
approaches.
Table 4.3: A comparison of leading cellular phone manufacturer activity in the United States
Motorola s 2
"Leading cell phone manufacturer"
Motivation
compliance, environmental
responsibility, customer support,
asset recovery
compliance, environmental responsibility,
customer support, asset recovery
Cited challenges
collection, shipping costs
collection, shipping costs
Most promising
initiative
"Race to Recycle" incentive program
that offers schools $4 per phone
potential partnership with US Postal
Service for collection - solves "first mile"
problem
Consumer
collection
E-bay Rethink, free mailers, incentive
programs, collection events
Transportation
primarily individual shipments to
Dexter, Ml, encourages larger
shipments of 100 phones
primarily individual shipments to Fort
Worth, TX, encourages larger shipments
Processing
relationships with vendors in several
locations, competitively bid each year
Long term relationship in TX
Management
environmental research and supply
chain operations
Materials disposition
Magnitude
goal for "race to recycle" is 3m bs in
2005
<$1m lbs per year
Goal
corporate social responsibility
corporate social responsibility
....
....
..".
_.....
._
_.
...
... .......
......
.......... ...... .......................................
E-bay Rethink, free mailers, collection
events, collection at service and
"experience" centers
While such pre-existing systems in the United States are not designed or equipped to address the
scale of recovery that is necessary, the regulatory landscape in the United States is very different
from Europe. Despite precedent set by other countries, the United States has not passed
legislation to address electronic Waste at the national level. There have been a number of
exploratory activities, however. To start, the EPA funded and participated n a stakeholder
dialogue called the National Electronics Product Stewardship Initiative (NEPSI), which took place
from June 2001 until February 2004. The NEPSI group's main goal for the dialogue, agreed to at
77
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
its June 22 meeting in San Francisco, was "the development of a system, which Includes a viable
financing mechanism, to maximize the collection, reuse, and recycling of used electronics, while
considering appropriate Incentives to design products that facilitate source reduction, reuse and
recycling; reduce toxicity; and increase recycled content." Participating in this dialogue were
several state environmental agencies, recycling organizations, and a number of manufacturers,
including: Panasonic, Hewlett Packard, CompTIA, Philips, Sony, Canon, JVC, Epson, Microsoft,
Nokia, Thomson, Dell, Sharp, Compaq, Solectron, among others.
One of the informal outcomes of the NEPSI dialogue was the establishment of the
'Manufacturer's
Coalition for Responsible Recycling," a group of thirteen electronics companies
that have joined together in support of applying an advanced recovery fee (ARF) to the sale of
new electronic products. The group includes IBM, Sony, Sharp, Panasonic, JVC, and Samsung.
They believe an ARF approach is the best way to viably finance waste management at both the
state and national levels. The group has published many white papers detailing the benefits of
the ARF approach:5 3
·
The ARF is a visible to the consumer so delivers an educational message that consumption
implies environmental and economic impacts at end-of-life, and that old products should be
returned for reuse and recycling
*
The ARF system will not burden local governments with the costs of collecting and
transporting products, since those costs are covered
*
The ARF provides a consistent and adequate source of funds for recycling of historic and
orphaned products.
·
The system will build efficiencies and economies of scale in the infrastructure through
competitive contracting while maximizing local resources
·
The ARF maintains a level playing field in the market because it is equitable for all products
and sellers, and it offers the least opportunities for manufacturers and others to escape their
responsibilities.
*
When implemented at a state level, the ARF-based system will most readily transfer to a
national system when it emerges based on the NEPSI model.
Critics of the ARF approach believe that a flat fee on all products lacks any direct incentive for
individual manufacturers to improve environmental design. In addition, it detracts from the
investments that many manufacturers have already made to develop independent reverse supply
chain processes. While stakeholders will be involved in the design and management of the
system initially, the ARF approach ostensibly removes learning feedback and the incentive for
developing reverse supply chains internally - for either environmental or economic benefit.
78
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Interestingly, this debate may be played out pragmatically because of two bills as will be
described in the section below on state activity.
In the absence of federal government leadership, the states are leading the way in proposing
legislation and regulations, funding pilot programs and infrastructure research, and adjusting
existing laws to accommodate the development of more recycling services. While the pace of
change has been very fast, several organizations track the activity of individual states, including
the National Caucus of Environmental Legislators and the Northwest Product Stewardship
Council among others.
Figure 4.4: State recycling legislation 2005
~:2MD
l2
R....
....
ProducerResponsibilityBill
ARFBill
ARFpassed2003
pffp{1
n
Landfillban proposed
Retailertakeback
ProducerResponsibility
Studygroupunderway
nnqqrI
In
Inn4
Courtesy of Thompson Electronics, Inc.
79
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
In September 2003, California adopted bill SB20, the Electronic Waste Recycling Act of 2003
which was the first comprehensive electronics recycling policy in the United States. The act
requires retailers to collect a waste recycling fee, and the manufacturer to provide information to
consumers that describes where and how to return, recycle, and dispose of electronic products.
The bill also requires an Electronic Waste Recovery and Recycling Account to be established
within the Integrated Waste Management Fund in the State Treasury for collection of recycling
fees and distribution of payments to electronic waste recycling facilities. Retailers began
collecting fees in January 2005. This law is in line with those who support advanced recovery fee
as an approach to funding recycling.
In April 2004, Maine passed the first electronics producer responsibility bill, LD1892. The bill
establishes a statewide recycling system for computer monitors and televisions that is fully
financed by manufacturers. 5 4 This law is different from the act passed in California, because it
does not involve an advanced recycling fee. Rather, it places the financial and physical
responsibility of recycling directly on the manufacturers. Supporters believe that "the law gives
manufacturers the flexibility to design and Implement collection and recycling systems that best
suit their individual business model, and permits two or more manufacturers to join together to
accomplish the requirements of the bill." 55 HP is among the public proponents of this approach.
Moving forward, both sides may learn from the experiences in Europe with regard to high-volume,
collective national schemes verses membership based, competitive consortium. The real
challenge is to devise a system that accommodates both the Interests of manufacturers who
support collective Infrastructure and the Interests of those who see benefit in independent
systems.58
Case study on practices in the United States
Hewlett Packard and Dell are leaders in both market share and environmental commitment in the
7
United States. They jointly represented over 40% of personal computer market share in 2004,5
and were recognized by the Computer Take-back Campaign (CTBC) as the industry's
"environmental leaders" the same year.5 8 This recognition is based in part because of their
support for the Statement of Principles on Producer Responsibility for Electronic Waste authored
by CTBC and refined in conjunction with HP and Dell. This statement encourages the goals of
extended producer responsibility in a system where manufacturers partner with consumers and
state and local government agencies to recover electronic waste. In a press release, the CTBC
80
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
state: "HP and Dell's support for the Principles represents a significant break from many other
companies in the electronics industry, which are backing a more narrow solution that leaves
taxpayers bearing a significant share of recycling costs.... The Principles frame a crucial
distinction between the type of advanced (recovery) fee adopted by California, which CTBC, Dell
and HP do not advocate, and a system wherein manufacturers internalize costs associated with
collection and recycling of discarded products."5 9
Given this leadership and the fact that neither HP nor Dell supports the development of a
collective system financed by advanced recovery fees, it is particularly important that they
develop recovery systems that promote both business and environmental goals.
Table 4.4: A comparison of leading computer manufacturer activity in the United States
Dell 60
Hp 6 1
Motivation
compliance, customer support,
environmental leadership, risk
mitigation
compliance, customer support,
environmental leadership, risk
mitigation
Cited challenges
collection, transportation costs
collection, transportation
processing costs
Most promising
initiative
Asset Recovery Services for
corporate clients showing 500%
increase in collection volume in one
year
Office Depot partnership pilot yielding
10.5m lbs in 7 weeks
Planet Partners program set goal of 1
billion cumulative lbs collected from
1987-2007
...... .....I.............
........- .1..............................
costs,
~~~~~~~~~~~~~..............
....
. . . ......... ._...
Consumer
collection
special events, pre-paid and free
mailers, E-bay Rethink, potential
partnership with Goodwill
Transportation
goal of full trucks to central
processing in Austin, TX, may expand
to OH and west coast locations
goal of full trucks to Roseville, CA or
Nashville, TN
Processing
long term partnership, manages 1s '
and 2 nd tier, completes third party
audits downstream waste
long term partnership, maintains
employees onsite
I.............-.1..__....._..._..._.._..... ................
.............. .......... ...... . .......................
special events, pre-paid and free
mailers, E-bay Rethink, Office Depot
partnership
...............
.
.............. ..
.......... .......................
Management
Deployment Services
supply chain branch of Imaging and
Printing Group
Magnitude
52.8m lbs/year in North America
48m lbs/year in North America
a .Go
l ...........
...............
.........
......
Goal
.
even
.......... .
. s..............................
.
break even, charity support
....
...... ....
ost, charity support .............................
While there are a number of factors that influence the viability of reverse supply chain processes,
the nature and extent of regulatory requirements is a key factor. Ideally, regulatory mechanisms
81
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
would simultaneously promote environmental goals and business objectives. Clearly, such
details influence the management of reverse supply chains for compliance and whether or not
companies are able to create business value with prescribed approaches. Regulations must
carefully balance the need to address environmental externalities with the need to support
market-driven solutions that may be more efficient and sustainable economically.
4.3 Lessons learned about developing processes
The preceding sections introduced a number of issues associated with reverse supply chain
management. While all supply chain processes must be developed within a context of market
drivers, this is especially true in the case of the electronics industry. Reverse processes
represent a new area for innovation in a highly competitive industry, and regulatory pressures
ubiquitously raise the stakes for supply chain performance. As illustrated by cases n both the
United States and Europe, environmental expectations about the recovery of end-of-life
electronics conflict with behavioral and economic realities. Regulations intended to align these
drivers create opportunity for some companies and further obstacles for others. The following
section outlines current trends, challenges, and strategic considerations that define the
electronics industry response to date. These lists are not entirely inclusive, but provide a
snapshot of current contextual drivers and lessons learned.
4.3.1 Trends
Several trends are shaping the nature and extent of both regulatory pressure and electronics
industry response to pressure. These trends include:
a
Increasing attention to the issue.
As public awareness of the environmental Impact of electronic waste continues to increase,
industry and regulatory bodies have reacted with reports, special collection events, online
information, and pilot programs. Attention to the issue of electronic waste will continue to grow as
the international community passes legislation to address the issue and as obsolete product
continues to accumulate in homes. The growing number of investigative reports in state agencies
(at least 3 states are launching studies this year to add to the existing 28) and the emergence of
E-bay's RETHINK initiative in 2005 are indicative of this growth.
a
Dynamic rules.
Regulatory requirements continue to evolve in Europe and to be adopted in the United States.
Companies that follow legislative activity closely assume that deadlines, exemptions, and targets
are dynamic as this relatively new and ambitious regulatory approach progresses. For example,
medical devices were initially regulated under WEEE, and are now considered exempt. The
82
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
enactment date for all national regulations was originally August 13, 2005 under WEEE, and now
is rolled back in countries that were unable to draft guidelines in time.
*
Increasing volumes.
Numerous studies indicate that the volume of electronic waste will continue to grow as
production, obsolescence, and disposal rates increase. Consumers Union, publisher of
Consumer Reports, recently estimated that the average American household could expect to
discard approximately 68 electronic items over the next 20 years, including 20 cellular phones, 10
personal computers, 7 televisions, 7 VCRs or DVD players, as well as answering machines,
printers, and CD players.6 2 Studies conducted in Europe estimate that the quantity of electronic
waste is increasing by 3-5% per year, nearly three times faster than the municipal waste
stream.6 3
*
Net negative revenues.
Overall, the value of recovered parts and materials from electronic equipment is less than the
cost to collect, transport, and process this equipment. In fact, the material value of a $2000
computer at the end of its useful life is approximately $1.50-2.00,
65
$50 per computer.
64
whereas it costs upwards of
Nearly 80% of this cost is in the actual logistics processes.6 6 Although costs
may clearly be reduced as logistics and processing services become more advanced and
competitive, processing costs are also increasing as products become more compact, and
therefore, more difficult to dismantle. Markets for commodities would need to expand dramatically
to raise the value of recovered materials. At present, with the exception of cellular phone
manufacturers, no companies view collection of personal electronics from consumers as a valueadded proposition.
*
Emergence of 3rd party service providers.
The market for third party reverse logistics and service providers continues to grow in the United
States and Europe. This growth is indicated to some degree by the increase in research and
development of professional organizations such as the Reverse Logistics Executive Council and
Reverse Logistics Association. As one electronics representative described, "Logistics and
processing will grow just by the nature and magnitude of take-back that's going to be required.
My view is that this industry will grow like the waste industry. First small mom & pop shops will
offer services, then it will consolidate into a larger industry, and finally someone will buy it up and
become the low cost provider in a particular service. It's just a matter of time." With growth comes
the emergence of better and more competitive services, which will change the competitive
landscape. In Europe, select manufacturers themselves played a role in instigating this growth in
order to secure low cost, high quality services for their own compliance efforts.
83
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
4.3.2 Major challenges
In developing reverse processes, the electronics industry is facing major challenges that will
require both technical and organizational innovation to overcome. These include:
*
Operating costs.
Transportation costs are widely cited and clearly demonstrated to be a significant barrier to
further development of recycling networks. The net costs of transportation are closely linked to
several factors, including volume, distance, and mode. Manufacturers are making efforts to build
volume through special electronics collection events and partnerships with organizations that can
store larger volumes of equipment on-site prior to shipping. Currently, most processing occurs at
one or two centralized locations. Central processing may build economies of scale, but when the
primary cost is transportation, a decentralized approach may work best. Existing RCRA
regulations in the United States inadvertently serve to limit the availability of electronic waste
recycling services by designating volumes above a certain threshold as hazardous. However, for
the past three years, EPA has been in the process of streamlining requirements to reduce costs
for processing facilities.
7
In the meantime, some states are addressing this issue by handling
retired electronic equipment as "universal waste" and thereby reducing the management
requirements. A significant reduction in the costs associated with transportation and processing
could change the economics and viability of the entire reverse supply chain, and perhaps serve to
overcome the current trend of net-negative revenues.
*
Non-uniform rules.
In Europe, and increasingly in the United States, the varying nature of local regulations presents
a serious challenge to administration and operation of reverse processes. This non-uniformity
requires that each company stay informed of and develop processes to comply with several
independent regulatory systems. One manufacturer explained, "In Austria, waste is separated
into five categories: lamps, televisions and monitors, refrigerators, above 50 cm, and below 50
cm. In Germany, waste is separated into cooling, other large domestic appliances, consumer
electronics, small household goods, and power tools. In United Kingdom, there is no separation.
This difference in procedure is one of the biggest challenges for all companies." 68 Companies in
the United States may soon be dealing with similar challenges as states and municipalities adopt
independent regulations without a cohesive national framework. Costs include administration,
local lobbying, training, and loss of economies of scale.
Consumer participation.
Consumer participation is a challenge in the United States in many respects. The majority of
interviewed companies cited consumer awareness, participation, and lack of incentives as a key
challenge to generating the high volumes of product that they need to develop effective reverse
processes. One manufacturer described, "The real issue is driving consumer participation. We've
tried a number of incentive programs. We've seen better recovery rates on printers than personal
84
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
computers, but it's still very small."6 9 On the other hand, some companies are not inclined to
promote increased participation, because as one described, "Our research shows that most
people don't care about end-of-life offerings. There is no clear advantage to us to increase our
return rate. As a business, why would we provide incentives to do so? We've provided an easy
program - what more can we do?" 70 It is likely that this attitude is prevalent among companies
that were not involved in this or other academic and governmental studies. It raises an
interesting point. The US EPA continues to advocate voluntary initiatives as a means towards
environmental progress, including the development of electronics recycling infrastructure.
However, it is questionable whether or not voluntary approaches can replace regulatory directives
in generating adequate incentive for both consumer and manufacturer participation.
Material markets.
Recovered material prices are volatile due to fluctuations in the availability of or demand for
commodity materials like aluminum, steel, copper, and plastics. This volatility makes it difficult for
recyclers and reverse supply managers to plan cost-effective processes because there are no
steady revenue streams. As a result, existing recyclers are turning to "fee-for-recycling" service
models, which may or may not provide incentive for design changes related to material choice.7
In charging a flat fee or per pound rate, some of the financial uncertainty is removed from the
operation.
4.3.4 Strategic considerations
Current trends and challenges surrounding the issue of electronic take-back define the strategic
considerations of individual electronics companies. Decisions made in these areas may
determine whether or not reverse supply chains contribute to environmental and economic
success system-wide.
These considerations include:
System financing.
Manufacturers disagree on fundamental system financing in both Europe and the United States.
Representative positions are influenced by many factors, including product type, marketing,
sales, management capabilities, and strategic positioning. Many companies in the United States
support the advanced recovery fee approach because "it will be the least expensive overall,
easiest to implement, and most appropriate to transfer from a state level to a national system. "7 2
While this may be largely true, there are leading companies who would choose to administer
independent systems if participation is voluntary. This would remove a large percentage of
revenue and volume from the collective system, making its operation less viable. In Europe, the
debates about financial guarantees, advanced disposal fees, and collective systems mirror the
United States. It is critical to finance the system in a way that provides incentives to consumers,
manufacturers, and recyclers alike. While this may be challenging, companies need to determine
their position on various scenarios and how that may affect their position in the market.
85
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
*
System design.
While regulatory structure is still under development in the United States and to a lesser degree
in Europe, manufacturers have the prerogative to design a reverse supply chain that may benefit
their competitive position. Collection and reverse logistics processes are widely cited as key
challenges; manufacturers may pilot systems to provide incentives and opportunities for collection
and develop relationships with processing services and recyclers as they see fit. It is clear that
there will not be a standard solution that suits all stakeholders.
*
Use of 3rd party operators.
While nearly all companies manage some sort of reverse supply chain to handle product returns,
only one electronics manufacturer reported using these existing processes to handle end-of-life
product returns. In this case, the manufacturer was collecting very small volumes of end-of-life
product. The majority of electronics manufacturers In the United States and Europe are turning to
third-party logistics and processing service providers because this area is outside of their core
competency. This decision is pushing a relatively unsophisticated cottage industry into one with
an increasing array of technology and services.
Nevertheless, the decision to outsource logistics
or recycling processes Is an important one and may influence future ability to develop in-house
reuse or remanufacturing models or to enable recycling processes to nform design for
environment efforts. This decision also relates to conventional issues of supplier management
and the nature of relationships, either "arm's length" or actively cooperative, with suppliers and
service providers.7 3
*
Legislative involvement.
With changing regulation and a steep learning curve, leading companies are actively involved in
providing feedback to legislators. In the United States, over 15 manufacturers participated in
National Electronics Product Stewardship Initiative, a national stakeholder dialogue about
infrastructure for collecting, reusing and recycling electronics. Active involvement in rule-making
and voluntary initiatives may alter the time frame of alternative regulatory approaches.
a
Consumer outreach.
In the United States, leading companies are exploring ways to leverage product take-back efforts
to build brand reputation or to directly encourage additional sales. This is an approach to building
value through what might have been regarded simply as compliance requirements. Companies
are reaching out to consumers through collection events, by placing collection bins in public
places, by offering discounts for new products, and through charity fund-raising events like
Motorola's "Race to Recycle." Since consumer participation in recycling programs is a major
challenge that each of the companies interviewed identified, this represents an opportunity for
competitive advantage.
86
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Altogether, there are no easy solutions for the electronics industry in developing reverse
processes. It is clear that leading companies are addressing this issue within operational and
supply chain management groups. They are investing in research, outreach, and advocacy to the
public and government, building capacity for reverse processes through operations or
relationships or both, and adapting existing systems to accept the reverse flow. There are no
agreed "best practices" in this arena, because the both the regulatory bodies and the electronics
industry are certainly still in the learning phase. As trends and challenges change and continue
to shape strategic considerations, "best practices" have more to with how companies are learning
and positioning themselves with customers, governments, and partners for the future.
4.4 Summary
There are at least four types of product returns that must be supported by reverse supply chains,
including commercial returns, end-of-use returns, packaging returns, and end-of-life returns. The
management
of these reverse supply chains involves several unique and complex processes,
which must be developed within a context of environmental pressures and market drivers. This
point is particularly true when considering the emergence of reverse supply chains within the
electronics industry.
Today, there is considerable environmental pressure in the form of regulatory directives, liability
concerns, and social responsibility motivations that are prompting the development of processes
for wide-scale electronics take-back. What is the reverse supply chain response? While the
environmental imperative for action is very high, there are no easy answers to this question for
either legislators drafting requirements or supply chain professionals aiming to build value in
compliance. On one hand, the issues surrounding product take back relate to waste
management and building infrastructure for future environmental progress. On the other hand,
the issues relate to the supply chain capabilities of the electronics industry in developing distinct
processes that support corporate objectives and strategies.
Leading electronics companies are investing in research, advocacy and outreach. As trends and
challenges within the electronics industry change and continue to shape strategic considerations,
industry "best practices" are defined by how individual companies are learning, adapting, and
positioning themselves with customers, governmental bodies, and partners for the future. This
represents a challenging and important role for supply chain management professionals.
87
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Altogether, activity within the electronics industry illustrates the fact that supply chain processes
are important and should be developed with awareness of context. Companies that focus on
figuring out how a small number of distinct processes may address environmental pressure, take
advantage of market drivers, and support corporate objectives and strategy will be most
successful in the future.
88
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
1Walker, William T., "Rethinking the Reverse Supply Chain," Supply Chain Management Review,
4/2, (2000): 52-59.
2 Reverse Logistics Executive Council, "Glossary," available at www.rlec.org/glossary.htm,
accessed August 5, 2005.
3 National Recycling Coalition, "Economic benefits of recycling," and "Environmental benefits of
recycling," available at www.nrc-recycle.org/default.htm, accessed August 8, 2005.
4 US EPA, Office of Solid Waste, "Management of Scrap Tires," available at
www.epa.gov/epaoswer/non-hw/muncpl/tires/markets.htm,
accessed August 5, 2005.
5 The Journal of Industrial Ecology and Progress in Industrial Ecology are two relatively new
scholarly journals dedicated to industrial ecology research.
McDonough, W., Braungart, M., Cradle to Cradle: Remaking the Way We Make Things," North
Point Press, New York, 2002.
6
7 Kricke, Harold, Blanc, .L., Velde, S. van de, "Product Modularity and the Design of ClosedLoop Supply Chains", 46/2, (2004): 23-39.
Stock, J., Speh, T., Shear, H., "Many Happy Product Returns," Harvard Business Review, 80/7,
(2002): 16-17.
8
9 Ferrer, G., Whybark, d. Clay, "From Garbage to Goods: Successful Remanufacturing Systems
and Skills," Business Horizons, 43/6, (2000): 53-64.
10 Guide Jr., V. Daniel R., Van Wassenhove, Luk N., "The Reverse Supply Chain," Harvard
Business Review, 80/2, (2002): 25-26.
11Guide Jr., V. Daniel R., Van Wassenhove, Luk N., "Managing Product Returns for
Remanufacturing," Production and Operations Management, 10/2, (2001): 142- 155.
Nune, J.A.E.E. van, Zuidwijk, R.A., "E-enabled Closed-Loop Supply Chains," California
Management Review, 46/2, (2004): 40-54.
12
13
Blumberg, Donald F., "Strategic Examination of Reverse Logistics and Repair Service
Requirements, Needs, Market Size, and Opportunities," Journal of Business Logistics, 20/2,
(1999): 141-160.
14 Ferrer
15
and Whybeck, 2000.
Ibid.
16 Caudill, R.J., Dickinson, D.A., "Sustainability and end-of-life product management: a case study
of electronics collection scenarios," Electronics and the Environment, 2004. Conference Record.
2004 IEEE International Symposium on Electronics and the Environment, Phoenix, AZ, May 1013, (2004): 132-137.
17 Thierry, M., Salomon, M., Nunnen, J., Wassenhove, L., "Strategic Issues in Product Recovery
Management," California Management Review, 37/2, (1995): 114-135.
18
Gungor, A., Gupta, S.M., "Issues in Environmentally Conscious Manufacturing and Product
89
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Recovery: A Survey," Computers and Industrial Engineering, 36/4, (1999): 811-853.
19Bhuie, A.K., Ogunseitan, O.A., Saphores, J-D.M., Shapiro, A.A., Environmental and Economic
Trade-offs in Consumer Electronics Recycling: A case study of cell phones and computers," IEEE
International Symposium on Electronics and the Environment, Phoenix, AZ, May 10-13, (2004):
74-79.
Blackburn, J.D., Guide Jr., V.D.R., Souza, G.C., Van Wassenhove, Luk N., "Reverse Supply
Chains for Commercial Returns," California Management Review, 46/2, (2004): 6-22
20
Microelectronics and Computer Technology Coporation, Electronics Industry
Environmental Roadmap," 1995, available at gdi.ce.cmu.edu/comprec/eier94roadmap1
accessed August 8, 2005.
21
.pdf,
22
Ibid.
23
For more information, please refer to Dell, Philips, and Hewlett Packard environmental sites.
The Basel Action Network has published a number of reports and other resources about
electronic waste. Resources are available www.ban.org/main/library.html, accessed August 18,
2005.
24
The Silicon Valley Toxics Coalition has published a number of reports and other resources
about electronic waste. Resources are available www.svtc.org/, accessed August 18, 2005.
25
National Safety Council, "Electronic Product Recovery and Recycling Baseline Report:
Recycling of Selected Electronic Products in the United States," 1999.
26
27
US EPA, Office of Solid Waste,
EPA530-N-00-007,
August 18, 2005.
October
Waste Wise Update: Electronics Reuse and Recycling,"
2000, available
at www.epa.gov/wastewise/pubs/wwupda14.pdf,
accessed
Several states have launched research initiatives to examine the feasibility of state-wide
electronics recycling programs. These reports are largely available online and contain a fair
amount of general in addition to state-specific information. One example is lowa's 'Waste
Characterization Study" published in 2002, available at
accessed August 18, 2005.
www.iowadnr.com/waste/recycling/files/ewastestudy.pdf,
28
29
Wisconsin Department of Natural Resources, "Managing Used Computers: A Guide for
Businesses & Institutions," PUB WA-420 2004, January 2004
3o
Ibid.
31 Ibid.
32
Lin, C., Yan, L., Davis, A., "Globalization, Extended Producer Responsibility and the Problem of
Discarded Computers in China: An Exploratory Proposal for Environmental Protection,"
Georgetown International Environmental Law Review, 13/525, (2002).
33 ibid.
90
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
34
PRESSURES
Florida Department of Environmental Protection, "Florida's Strategy for the Management of
End of Life Cathode Ray Tubes (CRTs), Computers and Other Electronic Equipment" Discussion
Paper, September 2,1999.
35 Global Futures Foundation, report prepared for the US EPA Region IX "Computers, E-Waste,
and Product Stewardship: Is California Ready for the Challenge?" available at
www.crra.com/ewaste/articles/computers.html,
accessed August 3, 2005.
36
Ibid.
ElATrack: Global Regulatory Tracking Service, available at
www.eia.org/newpolicy/service.phtml,
and Raymond Recycling Laws Internationa, available at
www.raymond.com/international, accessed August 20, 2005.
37
Toffel, Michael, "The growing strategic importance of end-of-life product management,"
California Management Review, 45/3, (2003): 102-129.
38
European Commission Directive, 2002/96/EC of the European Parliament and of the Council of
27 January 2003 on waste electrical and electronic equipment (WEEE), Official Journal of the
European Union.
39
Scroope, Alan, "WEEE Basics," Green Supply Line, June 15, 2005, available at
www.greensupplyline.co, accessed August 20, 2005.
40
41 There are several sources available online that summarize WEEE requirements, including
"Europe Calling" by DeAnne Toto from Recycling Today, February 16, 2004, and "WEEE Basics"
by Alan Scroope from Green Supply Line, August 20, 2005.
42
Scroope, Alan, 2005.
43
Interview conducted with Thomas Marinelli, Philips, Inc. on May 10, 2005.
44
Interview conducted with Klaus Hieronymi, HP Europe on August 2, 2005.
45
European Recycling Platform, available at www.erp-recycling.org/,
46
This information is available on the European Recycling Platform website, cited above.
accessed August 20, 2005.
47 Greenwire, "EPA regulators say they will not make recycling mandatory," January 21, 2005,
accessed August 20, 2005.
available at earthworksaction.org/news.cfm?newslD=22&catlD=1,
48
Bhuie, 2004.
49 Ibid.
so Ibid.
Interview conducted with a representative from a leading cellular phone manufacturer on
August 3, 2005.
51
52
Interview conducted with Bill Olson, Motorola on April 25, 2005.
53
Electronic Manufacturers' Coalition for Responsible Recycling, "Implementation of an ARF
91
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Financed and Stakeholder Managed System," May 2005
Northwest Product Stewardship, "Policies & Legislation," available at
accessed August 20, 2005.
www.productstewardship.net/policiesElectronicsOtherStates.html,
54
Online posting from David Wood, Executive Director of the GrassRoots Recyclng Network, May
3, 2004, available at www.greenyes.grrn.org, accessed August 20, 2005.
55
56
Electronic Manufacturers' Coalition, 2005.
57
Market share statistics available several places online, including CNN Money and Fortune
Online.
Computer Take Back Campaign, "Fifth Annual Computer Report Card," May 2004, available at
www.computertakeback.com, accessed August 30, 2005.
58
59 Computer Take Back Campaign, "Environmentalists Issue Report Card on E-waste Industry,"
May 19, 2004, available at
www.computertakeback.com/newsandresources/press_releases/pr_2004_report-card.cfm,
accessed August 30, 2005.
60I
60Interview conducted with Ken Hashburn, Dell on May 10, 2005.
61
Interview conducted with Steve Rockhold, HP on April 25, 2005.
62Thompson, Mike, "Handling of Electronic Waste," Senate Environment and Public Works,
Capitol Hill Hearing Testimony, July, 26, 2005.
63
Bhuie, 2004.
64
International Association of Electronics Recyclers (IAER), "Electronics Recycling Industry
Report 2003," 2003.
65
Bhuie, 2004.
66
IAER, 2003.
US EPA, Office of Solid Waste, "Regulatory requirements for generators of CRTs," available at
accessed August 20, 2005.
www.epa.gov/epaoswer/hazwaste/recycle/ecycling/rules.htm,
67
68 Interview conducted with Klaus Hieronymi, HP Europe on August 2, 2005.
69
Interview conducted with Ken Hashburn, Dell on May 10, 2005.
70
Interview conducted with a representative from a leading printer manufacturer on July 7, 2005.
National Safety Council, "Electronic product recovery and recycling baseline report: recycling of
selected electronic products in the United States," 1999.
71
72
Electronic Manufacturers' Coalition, 2005.
73
Preuss, 2005.
92
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Conclusion
The complex relationship between supply chain management and the natural environment
impacts human health, environment, and the long term viability of business. This relationship is
becoming increasingly important to corporate functioning. As environmental concerns prompt
corporations to address the environmental implications associated with mass production, leading
corporations will turn to supply chain management to pursue both environmental and business
goals. Existing literature and industry accounts make it clear that there are innumerable supply
chain processes that may contribute to environmental improvement. There is, however, no
universal approach. The most appropriate supply chain response will vary considerably by a
context defined by the nature and extent of environmental pressures and market drivers.
Today, there is no theoretical framework that describes generally an approach for developing
operational business processes that appropriately support environmental objectives and business
strategies. Such a framework may be used to bridge the efforts of environmental management
and supply chain management in theory and practice, while serving as an anchor for prescriptive
advice on how to best respond to environmental pressures. A growing body of literature deals
with dimensions of this issue, but falls short in some ways. This thesis has directly addressed
three of these shortfalls:
1. There are four sources of environmental pressures: regulations, customer demands,
resources, and ethical responsibility. Although these pressures are generally grouped
together in existing literature, they actually impact the supply chain in very different ways.
Conversations with individual firms across four industries indicated that each of these
pressures affect the current supply chain decisions of at least one firm interviewed. It may be
assumed that as environmental pressures increase, companies that are better able to identify
and understand them will be better positioned to address these pressures strategically.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Figure 2.1: Sources of environmental pressures affecting the supply chain
iI
defines
f;UtI.'~dML.~-i
'- -
.
--
.
regulations
,'
.
I
I
--
ethical
,
-
dAfin.qhAhavinr
within constraints
responsibility..---.
'------.
--- !y
2. A framework for supply chain excellence applies to supply chain environmental
excellence as
well. In direct response to environmental pressures, companies should develop a supply
chain operating model that is supported by operational objectives and processes. This
framework does not suggest that there is a universal approach to environmental issues. In
fact, there are situations where being less proactive environmentally may be more
advantageous than not. In addition, there are innumerable processes that may generate
environmental and economic value for each basic function of the supply chain. While the
greatest operational and financial benefits come from focusing on one or two distinct
processes, this is also true of environmental benefits because concentrated efforts may yield
effects that will ripple through the supply chain.
3.
Supply chain processes should be developed in a context defined by environmental
pressures and market drivers. Environmental pressures come from four sources. Market
drivers are the result of regulatory, behavioral, and economic trends and challenges. The
collective impact of these things shape a number of strategic considerations for individual
firms and the overall supply chain capabilities of an industry.
A close look at the emergence of reverse supply chains within the electronics industry illustrates
each of these findings. The electronics industry is faced with environmental pressure from
evolving regulatory directives, liability concerns, and social responsibility demands. While leading
94
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
companies are researching and piloting reverse processes to varying extents, a number of
trends, challenges, and strategic considerations have been identified:
Trends.
-
increasing attention to the issue of end-of-life electronics;
-
increasing volumes of end-of-life electronics;
-
dynamic regulations;
-
net negative revenues; and
-
emergence of 3rd party service providers.
Challenges.
·
-
operating costs;
-
non-uniform regulations;
-
consumer participation; and
-
dynamic material markets.
Strategic Considerations.
-
system financing;
-
system design;
-
use of 3rd party operators;
-
legislative involvement; and
-
consumer outreach.
One conclusion that may be drawn from the industry case study is that there is no universal
solution or established "best practices" in the realm of supply chain management and the
environment. Rather, the supply chain response to environmental pressures is characterized by
the manner in which individual firms learn, adapt, and position themselves with customers,
governmental bodies, and partners for the future. As environmental pressures grow more
demanding and diverse, supply chain professionals maintain a challenging and important role
across industries.
Moving forward, this research represents an early examination of one industry's supply chain
response to a particular set of environmental pressures. The response involves the development
of reverse processes, which include only a small number of all supply chain processes. This type
of targeted research may easily be expanded in many ways.
First, the development and
contextual drivers of other processes may be assessed, including processes to support supplier
relationships, design for environment efforts, and purchasing programs. More focused interviews
may be conducted to relate process development to the overall framework for supply chain
environmental excellence. In this way, new environmental activities may be compared for
relevance to and impact on a company's supply chain operating model, objectives, and
95
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
processes. Processes may be further evaluated for environmental performance using appropriate
metrics. Finally, the environmental and financial performance of electronics companies who
focused efforts on one or two processes may be compared against those who implement several
across the supply chain. This research may be repeated to examine and compare many other
industry sectors.
The ideas presented in earlier chapters prompt further research as well. Understanding the
fundamental relationship between supply chain management and the environment is a
complicated and challenging endeavor. To begin with, the direct and indirect environmental
impacts of supply chain management as a global practice may be isolated and quantified.
Particular outcomes of supply chain decision-making may be identified as "environmental culprits"
in order to better understand the global factors driving these outcomes. Next, various supply
chain models may be compared for environmental impact, including models based on just-intime, lean, and asset utilization principles. In a separate but related study, environmental
pressures represent a large area for research. Pressures affecting individual industry sectors
may be systematically addressed, including a more comprehensive effort to catalogue global
regulations. The relative pressure coming from each source may be quantified by identifying
appropriate indicators and assessing whether or not environmental pressure is adequately
signaled to companies. Altogether, further research may clearly establish a relationship between
environmental pressures, supply chain management strategy, and emerging processes in a
context of economic, behavioral, and political drivers. Ideally, these efforts will ultimately present
a path towards to the development of supply chains that enable increased profitability and
environmental sustainability.
Supply chains today represent the strategic integration of hundreds of decisions, each with
economic and increasingly significant environmental implications. As supply chains continue to
mature into sophisticated networks of material and information flow, so may the ability to trace the
environmental impacts of individual products and activities along the supply chain and address
these impacts proactively. However, this ability will not develop spontaneously, but rather in
awareness of and in response to environmental pressures.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Appendix A
Sample questions for semi-structuredindustry interviews
Introduction
I am interested in learning about how your supply chain responds to environmental regulations
and pressures. I will ask about three primary areas during this Interview: 1) current supply chain
practices that relate to the environment, 2) practices under evaluation, and 3) decision-making how you evaluate future practices
Orientation questions
1.
2.
3.
What is your job?
How does your work fit into the company structure?
What led you to this current position?
Supply chain questions
1.
What is the basic structure (operating model) of your supply chain?
·
*
*
*
2.
What are your biggest environmental regulatory concerns?
*
*
*
*
3.
Do you consider new environmental concerns to be threats or opportunities?
How closely do your supply chain managers follow these changes?
Do you think your customers care about the environment?
*
5.
How do your competitors address issues related to the environment?
What do you consider best practice?
Who makes decisions related to compliance activities?
What is the most costly compliance activity in terms of time and money?
How do you think changes in the environmental concerns may affect your industry?
*
*
4.
What are the top considerations in supply chain decision making?
What do you think your company does particularly well?
Where do you think improvements could be made?
Do you have supply chain performance improvement goals?
What do you think your competitors will do to address those concerns?
What do you think the most proactive companies in your industry are doing?
When selecting suppliers, how would you rank the following performance areas?
-
Brand reputation
-
Cost
Environment
Reliability
Speed
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Meeting Minutes
Participants: Julie Paquette, MIT; Roy Wiley and Henry King of Safety and
Environmental Assurance Centre, Unilever
Date: December 6, 2004
Roy, Henry, and I discussed their perspectives on the supply chain response to environmental
pressures and legislation. Both are employed within Unilever's independent Safety and
Environmental Assurance Centre. Roy focuses on factory based initiatives; Henry on strategic
supply chain initiatives.
Both answered a set of informal questions, as follows:
Q: What is the history of SEAC?
SEAC s the corporate group to assure safety for Unilever - not only environmental safety, but
also food safety, product safety, etc.
After a safety incident in the early to mid-1960s, Unilever established an independent
organization within the corporation to assure safety. The agenda expanded to the environment
came into it in the 1970s, and then towards sustainability as a whole. Our initial environmental
report in the early 1990s established fisheries, water, and agriculture as Unilever's primary
environmental concerns.
Q: How do these concerns relate to supply chain?
Our fisheries initiative is specifically aimed at supply chain management. We couldn't imagine a
sustainable business model without a sustainable (adequate and affordable) supply of fish.
However, this is not something we could do unilaterally - we needed to move our initiative into
the market place. But how do you communicate this type initiative to suppliers and customers?
Q: How did Unilever do it? Within industry?
With fisheries, we initiated discussions with competitors, etc. Our basis was that Unilever provide
seed money and endorsement with the WWF to establish the Marine Stewardship Council as an
independent organization for certification. Our commitment was to use certified fish only. Several
governments also wanted their own certification scheme.....so our internal target changed from
MSC certified" to "MSC or equivalent."
Agriculture started as an internal exercise to establish best environmental practice for our
contract farming organizations - we started with our largest areas that we have influence - tea,
tomatoes, etc. - we weren't looking at an ndependent certification scheme, although in
establishing the metrics for what may constitute sustainable practices, we involved outside
experts.
Q: What about packaging ordinances in Europe?
The Essential Requirements has only been adopted in three countries, most countries are not in
compliance. Much of the debate surrounding packaging is about adopting environmental
indicators for the best packaging. But implementing the Essential Requirements should be a first
step.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Q: In terms of decision-making - are environmental impacts driving the decisions being made or
are they just one consideration in supply chain?
You have every end of the scale. With the fisheries, you might argue that environment is a critical
factor. On average, across the business, at the end of the day many of the decisions are about
cost. Environmental issues that translate into cost are considered, but these would not be labeled
environment - they're called transport costs, or utilities, or a legislated tax. Environmental costs,
however, are still a small part of overall lifecycle costs.
Q: Do you have a sense of how much costs savings actions are actually helping the
environment?
No. Though, I think that many cost savings do help the environment. In our own manufacturing
activities, we've gone through rigorous environmental reporting - and we could perhaps tell you
how much money we have saved from this reporting (if we've published it.)
There is also the issue of segmented management - logistics managers, factory managers,
buyers manage suppliers - often you get individual management across the product value chain.
It is all optimized for cost.
Q: What is Roy's responsibility on the facility side?
My role is factory based - Unilever factories. As a group, we look at geographical regions,
consider the highest environmental impacts, and then try to drive them down. The vast
proportion of our production is internal, and this is the data we report. When we started
environmental reporting, 90% of our production was internal - and it has gradually changed to
approximately 70%.
Q: Does outsourcing concern you from an environmental point of view?
It depends on what way you look at it. There is some activity underway looking at those types of
issues. We have a code of business principles, of which environmental risk and performance are
included with a supplier assurance process.
We recognize that we run risks in our supply chain whether it is contract manufacturing or raw
material suppliers that we need to manage - environmental, social, quality, whatever.
We recognize that the risks are increasing and we have a more rigorous process of managing
supplier assurance, but I am convinced that it will not be in the same way that we manage our
own factories. We cannot and we shouldn't take that level of responsibility.
Q: What is the Unilever's vision for the future for the larger industry in terms of sustainability?
Whatever organization you are in, unless someone expresses a particular set of values, it is very
difficult to operate outside a cost driven framework.
Environment is not a huge cost from a business perspective, compared to labor, capital, or raw
materials. This could change in the future - taxation schemes could be environmentally based
rather than labor based. Currently, environmental compliance represents less than 10% of
manufacturing costs.
Everything we do in supply chain ultimately relates to selling a product to a consumer. So there
are a number of management issues that may be raised in the future - environmental ssues,
labor Issues, etc. It would be great if good management of these types of issues could translate
into consumer sales. 1-2% of all nvestments now are held in "socially responsible" investment
funds. So although not mainstream, if you are spending lots of time and building a reputation on
99
THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
the Dow Jones Sustainability Index, etc - this may pan out into the future. But it is very difficult to
go into a meeting today and explain this approach.
It's a matter of identifying in which issues we need to be proactive. This decision often comes
down to sustainable business decisions. In many areas it takes the whole of Industry to change.
There are things we could do - or our competitors could do - but there are many stakeholders at
play.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Meeting Minutes
Participants: Julie Paquette, MIT; Rick Vanlandingham, Manager of Quality and
Reliability Assurance, Texas Instrument
Date: December 7, 2004
Rick Vanlandingham and I discussed his perspective on the supply chain response to
environmental pressures and legislation. Rick has been employed by Texas Instrument in
various capacities for approximately thirty years.
Rick answered a set of informal questions, as follows:
Q: What do you do at TI?
I am the quality and reliability assurance manager. I work with development and manufacturing
teams help deliver customer's requirements - both voiced and unvoiced requirements - including
environmental and reliability ssues along the entire supply chain.
Q: What are examples of the environmental and reliability issues?
A good example of reliability and environmental overlap is in lead solder connections between
one circuit to another. Over the next nine months all of our suppliers will begin shipping to us
products that are free of lead solder by July 2005. The main incentive for us to do this is the laws
in Europe as well as those promulgating around the US and world.
Changing a well proven technology with a lot of forgiving characteristics to a less forgiving
technology is a big deal. We've been working on this for approximately 10 years.
Q: How do you feel TI is handling this issue compared to competitors?
Compared to competitors, TI is handling this conversion consistently. We've benchmarked and
looked at what others are doing. Industry has been active on this n Washington and elsewhere
for a number of years.
We've been talking about the conversion of lead. When you discuss the RolHS directive in total there are a wide range of approaches. Some are just reactive "give me the recipe and we'll deal
with it when problems show up." Others are groundbreaking and require Investment n R&D. TI
approaches are somewhere in between.
Given that we handle $500 million a year in the calculator business - we don't have the financial
resources that some of the other organizations have. We've followed the lead of others, we've
reviewed best practices, developed our own process qualification on joints and reliability testing,
and have begun to implement that in product usage.
Q: How will the actual conversion take place? How will your suppliers be managed?
We meet monthly with our suppliers and talk about their progress and their schedules for
switchover. We define how they will verify how things will perform, look at laboratories n their
own facilities. We review action plans, we help manage stocks as they switch over. We will put
out mixed technologies for a period of time during the transition. And then we'll know when we've
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
switched strictly to non-lead.
reviewing.
PRESSURES
It is an extensive process, but most of our work is monitoring and
So to implement RoHS, we will follow a similar path. We will use certificates of compliance and
analysis on high risk components. Although we will have a complete bill of materials, we're not
going to have everything analyzed. Since we deal with highly reputable and established suppliers,
to take the time to review their laboratory analyses is not necessarily value added work. None of
our direct suppliers are the sort that you may characterize as unreliable, short term, or fast
transition organizations with less than 6 months of operation.
We believe we are well positioned to meet the deadline of RoHS, and ship compliant products
before July 2006 deadline.
Q: Do you anticipate offering different products for Europe and the US based on RoHS?
By and large, our products for Europe and the US will not be different. However, some of our
markets are different. Some of the business calculators in the US are not popular in Europe.
Adaptors are different for the US and Europe. Not all US products will comply with RoHS at the
same time as Europe.
Q: What is your experience with the packaging directives?
You gather your information, find a good service provider, like Green DOT, pay your fees and
minimize your costs.
Rarely do you see this type of initiative bring value to most industries. A presentation at an IEEE
conference showed that customers showed that only 1-2% pay any attention whatsoever to
environmental impacts of products - of those, only 1/10 would pay more money for environmental
products.
Q: Since it is not creating value for the customer or T, how do you make decisions about what is
worth pursuing or not?
We do make decisions based on market demand. Our educational customers, for instance, do
tend to fall more into the 1/10 of 1% that value reduced environmental impacts. We built an Ecocalculator for Europe - recycled papers, soy inks, the calculator is solar powered, no battery at all
in it, case plastics are 100% post consumer, blue angel solar power. We sell enough of these to
continue to manage and build - but it is not a high runner by any means. We try to address
certain segments of the market that have concerns.
And we address regulations, of course.
Q: How do you plan on complying with WEEE?
Through 3rd party collection and disposal groups. Our calculators need to be big enough to use,
which changes constantly. But smaller is better, more power efficient, and it needs to last a long
time.
The environmental ideal of easy disassembly needs to be balanced with these needs.
We have disassembly of our own in the returns products. We sell obsolete products on home
shopping networks, magazines, etc. If we can't put it to use, we disassemble and
demanufacture. There is not a lot of reuse - we separate into plastics, circuit board, and things
that are safe for municipal waste or incineration. We sell the plastic to people making outdoor
furniture and posts.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
But most of our plastic since it does not contain a lot of high energy circuits, does not contain
flame retardants so it is an excellent candidate for those types of secondary products.
In our own demanufacturing operations, we are ISO14000 certified. We do audit where the
product goes - we have certificates of disposal - and audit where the trails of operations go. In
other cases where we are contracting with large industry consortiums, we work with top notch
ones.
Q: In the future, what constraints do you see becoming the most relevant and how do you see
supply chain responding to them?
Energy consumption will become one of the most important Issues - across the life cycle - in
production, manufacturing, and in use - computers, monitors, printers use phase is really HIGH.
It dwarfs the use in production - reducing that portion is the next big customer concern.
Q: Is industry positioned to address this issue?
There are a lot of very creative scientists and engineers world wide. Most of the time, it is the
lack of resources to be able to focus the talent on the right things. Need to prioritize - what is the
most important in front of us today Will be changing tomorrow. I believe that when industry
focuses, then solutions are found.
Overall, regulations provide a level playing field to everyone. Leading companies are already
performing beyond regulations.
Q: When working with suppliers, how do you consider: brand reputation, cost, environment,
reliability, speed
No priority - all our suppliers must achieve at a certain level of performance before we talk. All
must have ISO 14000, since 2000 transition. They also need ISO 9000.
Our measurement criteria for all the suppliers, includes reliability, ability to develop the products
we need, their product development expertise and execution, delivery or operational execution,
and environmental programs. Each gets a different total number of points - - but shouldn't be
considered a priority, we wouldn't be talking to a supplier who scores below a 70 on our overall
scale. Above the 70, score system grades.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Meeting Minutes
Participants: Julie Paquette, MIT; Koen Goosens, Interbrew
Date: December 8, 2004
Koen Goessens and I discussed his perspective on the supply chain response to environmental
pressures and legislation as a logistics professional. Koen has been employed by Inbev!, the
world's leading beer brewer with more than 200 brands, for approximately four months.
Koen answered a set of informal questions, as follows:
Q: How is you supply chain structured?
Since the merger, supply chain more important. We are decreasing the number of breweries and
therefore increasing the number of Imports. The overall supply chain structure is varied. In some
countries we are completely vertical and other not. It depends on the culture and local habits. In
Belgium, we are fully vertically integrated. In Germany, we are not. Europe is diverse from a
market point of view. So the supply chain responds to this.
Q: From a SCM point of view, what are your top environmental concerns?
From the corporate level, much of corporate responsibility has to do with alcohol consumption
and the quality of the environment because we are a food industry.
Supply chain is influenced by these things as well as anything effecting bottling. Bottling issues
affect us more on an implementation level though rather than strategic level.
Q: What is the difference between operational and strategic?
For instance, decisions about bottling materials effect weight etc, so when governments make
changes n bottling requirements, such as glass bottles vs. plastic, we adjust transportation and
distribution to minimize weight and costs.
Q: Would you say that Interbrew is compliance driven?
Yes. We obey local regulations around the globe.
Q: It seems like the packaging costs in beverage industry must be a high percentage of costs,
and being able to reduce these costs would be advantageous.
Yes. But the cost of the packaging affects transport costs. Returnable crates, etc, also drive up
our transportation costs. In Europe especially, this is an important consideration.
Q: In terms of new environmental regulations, do you feel that your supply chain is well poised to
react?
Yes. We have a diverse market that can handle a diverse number of issues. We also have good
local presence.
Q: What do you think are the top concerns going into the future that you will need to deal with?
Consolidation is one of our main supply chain strategies right now. I view environmental concerns
as something coming from governments that we need to be able to react to. We need to have
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
transport and distribution networks that are capable of changes in oil prices, etc. It is all on the
operational level.
Resiliency in our case is a product of diversity and local presence. We can react to changes
quickly, so changes in environmental laws or costs associated with environmental concerned may
be handled.
Q: How do you manage suppliers?
Our direct suppliers agree with our corporate responsibility statements. We also work directly with
raw material suppliers for quality assurance.
Q: How do you select suppliers - what are the top considerations? Based on the five given?
5. Reputation
2. Cost
3. Environmental performance
1. Reliability
4. Turn around/speed
Interbrew reputation stands on its own, if everything else is in place, we don't care about
reputation.
Q: How are compliance activities handled within your company?
We have someone in our corporate office that looks at all of this.
Q: Do you know if there are environmental metrics that they track? (I suggested some: carbon
emissions, waste generation, etc.)
Yes, they use all of those. And as a supply chain person I have access to that Information, and I
use it to know who is performing well and make decisions - but mostly for target setting. The
information is shared with facility managers and it has been very effective in improving
environmental performance. They provide benchmarks.
Some of the measures that are used include: energy consumption by unit, waste water by unit,
etc. We track approximately 10-15 metrics.
Q: In your opinion and experience, do you think environmentalconcerns will play a larger role in
supply chain management in the future?
They are increasingly important because they affect the world wide global network. But t also
depends on the industry and the extent to which you operate globally. Supply chain professionals
in the future are going to need more diverse skills, understanding finance, environmental and
social concerns, and how everything relates to delivering products to customers.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Meeting Minutes
Participants: Julie Paquette, MIT; Dr. Tom Hellman, Executive Vice President,
Compliance Services, Limited Brands, Inc.
Date: March 23, 2005
Tom Hellman and I discussed his perspective on the supply chain response to environmental
pressures. Tom has a broad background in environmental health, safety, and strategy. He
currently serves as executive vice president n compliance services, and has been employed by
Limited Brands, Inc. since 2001.
Tom addressed an informal set of questions. His responses are paraphrased below.
The issues that the retail companies face are quite different from other organizations in my
experience. With companies such as Bristol Myers Squib and General Electric, which are
vertically integrated and highly regulated, products are regulated from Inception to end-of-life.
This structure does not exist in the same way for retail. Limited Brands supports six brands:
Victoria's Secret, The Limited, Express, Henri Bendel, White Barn Candle Co., and Bath & Body
Works. These brands may be organized into three business areas, including personal care
products, intimate apparel, and clothing and accessories. We deal with a wide range of
compliance issues which s complicated by the fast pace of change and demand for new
products.
We are very concerned with global climate change and the environmental issues in China. Air
and water pollution are very serious issues. I travel to China approximately twice per year, and
have noticed increasing levels of air pollution. Though they are trying to address these issues, it
is extremely challenging and will likely take the form of command and control regulations in the
next 15 years. Energy shortages are a serious concern. The country experiences a sort of
.rolling brown out" with planned shut downs at manufacturing facilities weekly. The public in
China, and other developing countries, will deal with these environmental problems and demand
a governmental and industrial response. Neighboring countries are also affected by this - Hong
Kong s the recipient of much of China's air pollution, pollution levels recorded recently in Hong
Kong were highest in history.
Since much of our apparel products come from China, environmental regulations - and other
types of regulations like labor laws - will impact our supply chain. Across the industry, the supply
base will change since some vendors may go out of business or operate differently.
The majority of personal care products are manufactured in US and Europe, with well developed
regulations. In the future, it is plausible that more of this work will move to China. China is
playing an increasingly important role across the industry, so China's need for reliable, clean
energy, changing manufacturing regulations, and transportation issues are critical factors to
future plans.
The key question is - how do these concerns for the future translate into activities for today?
Limited s currently involved n several product stewardship initiatives, including SC Johnson's
Greenlist T M system, which classifies product ingredients according to their Impact on the
environment and human health. Limited also supports energy efficiency programs for retail
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
locations, and sustainable packaging initiatives with Environmental Defense and Pew Charitable
Trust. A lot of this work is information building that we integrate into new products and higher-end
products.
A key challenge is balancing environmental sustainability with business goals, of course. For
instance, we work with logistics providers who are trying to 'green the supply chain" by using
more ocean than air transport. Ocean is less expensive and more efficient - but poses a big
challenge to fast paced businesses like Express that depend on trendy products with fast turnaround. The business model sometimes makes it difficult to do simple things. Also, in my
experience working n other companies - although consumers say they want "environmentally
friendly," what they mean is environmentally friendly at the same price and performance. That's
the fundamental challenge. Our customers have not demanded an environmentally superior
product.
At the same time, Limited cares very much about protecting the brand. In the end, our customers
are interested in the product style and function, and there is an emotional attachment to the
brand. Environmental expectations and the enforcement of responsible behavior will continue to
increase the same way labor expectations have ncreased. Companies from the US and Europe
have forced more responsible practices (as defined by US and EU standards) on their primary
vendors because they don't want to risk hurting the brand. Vendors in China and other
developing countries who want to sell to the US and Europe typically maintain Internal codes of
practice and are audited by customers as often as 5-6 times per month.
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Appendix B
Questionnaire for semi-structured interviews with electronics industry
The following questionnaire was distributed to electronics industry representatives when first
approached for an interview. It was sent again as a reminder and to serve as a general guide
during semi-structured interviews.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Ili 2020
This questionnaire was developed as part of the Supply Chain 2020 research initiative exploring
critical factors and technologies that will shape supply chains of the future. It is intended to
facilitate discussion about the development of reverse supply chains for compliance with the
WEEE Directive. Participation in this survey is entirely voluntary.
1. Introductory
a. Does your company have a reverse
supply chain for any of the following?
o3EoL
products
Cl unsold products
3 product returns
b. With EoL products, what are your reverse
supply chain goals? (Choose all that apply.)
[ WEEE compliance
customer service
o better
[ customer loyalty
o IP protection
o3cost savings
[ new revenue
L learning about products
[ other types of learning
2. Management
a.
b.
c.
3. Cost
a. What are key cost issues associated with your EoL activities?
4. Collection
a.
b.
c.
How will you collect product from the customer?
How many collection facilities will be available to your customers?
Will you engage in partnerships with other organizations, such as
retailers, municipalities, or third-party service providers?
5. Quality
a.
b.
c.
d.
What types of products are you accepting?
How will you handle other manufacturers' EoL products?
Will you differentiate your collection strategy by product age?
How will product be sorted at collection facilities?
6. Quantity
a.
b.
c.
How much EoL product are you collecting?
What is your collection goal? products/month - pounds/year - etc.
What is your capacity to handle EoL product? In house? Third party?
7. Timing
a.
How frequently will you collect products from customers?
8. Customer
a.
b.
Are there incentives for customers to return products to you?
What other options are available to them as you see it?
a.
b.
How will the end-of-life products be transported from collection?
How far will the EoL products be transported?
incentives
9. Transportation
Where in your company is the EoL reverse supply chain managed?
How many people are Involved in EoL reverse supply chain activity?
What are the management goals and indicators of success for the
reverse supply chain?
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
10. Processing
a.
b.
c.
d.
11. Markets &
revenues
PRESSURES
Where are your processing facilities located?
How many employees will your process require at each facility?
What are the processes? Inspection? Sorting? Disassembly?
Recycling?
What sort of guidelines will be in place to support inspection and
sorting?
a.
b.
c.
What material streams are generated from your processes?
What is the destination of these material streams?
Is there revenue/cost associated with these streams?
d.
What are the factors that may
affect your ability to create new
revenue from EoL product?
O future product design
What are the major revenue
sources for funding these efforts?
o remanufactured product sales
e.
El regulations
E demand for materials
0 part sales
o material sales
O fees
o other company funds
Thank you for you participationl
Please note: Participating firm names will be withheld from the report unless approved in
advance.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
Discussion Notes
Participants: Julie Paquette, Jeremy Gregory, MIT; Steve Rockhold, Hewlett Packard
Date: April 25, 2005
Q: Does your company have a reverse supply chain for any of the following?
HP has all three reverse supply chains: EoL products, unsold, and product returns. My area is
within EoL.
Q: With EoL products, what are your reverse supply chain goals? (Choose all that apply.)
WEEE compliance: Yes, and other legislative requirements around the world
better customer service: To some degree
Increased customer loyalty: There s certainly an element of that
IP protection: No, not as a primary driver
cost savings: Cost avoidance because it may cost us more to have someone else do it for us
new revenue: No - well if we really pushed ourselves perhaps
l learning about product use: No
0 other types of learning: We do learn a bit about how long our products last, we've done some
samples in a few situations to approximate any financial accrual. We know PC products coming
back are about 7-8 years old.
0
0
0
[
0
O
Q: Is there interaction between those handling the reverse supply chains for returned or unsold
product and those working in EoL?
No, not currently - I've worked in those areas previously, and they each require dedicated efforts.
For instance, inventory devaluation is a critical concern with forward supply chains and these
other types of reverse supply chains. With EoL, it is not a concern at all.
Q: Where in your company is the EoL reverse supply chain being managed?
Imaging and Printing Group for the entire company.
Q: How many people are involved in EoL reverse supply chain management?
There are two people who work with me centrally, and approximately 60 in the group working on
take-back, all within the supply chain organization of IPG. The take-back efforts are viewed as an
operational liability, so they are managed as an operation. In other companies, take-back and
recycling initiatives often fall under EH&S functions. Here, we handle it as an operation with
some EH&S overlap. I think this alone demonstrates a higher level of commitment from our
business management teams.
Q: What are the management goals and indicators of success for the reverse supply chain?
This is a constant balancing act between operating at the lowest possible cost and effectively
mitigating risk. In addition to cost, we focus on risk mitigation and responsible management for
public relations and brand protection.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Q: What are key cost issues associated with your EoL reverse supply chain?
Collection, transportation, and processing. The more plastic the more expensive it is. Leaded
glass monitors also pose a cost problem.
Q: How will you collect product from the customer?
The collection differs by region and channel.
In North America, we use a combination of pre-paid mailers, home pick-up by UPS and Fed Ex
(which the customer pays for), and retail partners like Office Depot.
The Office Depot collection events were great because we can leverage their reverse logistics
network and aggregation points. This is also the lowest cost because we're dealing with full
truckloads.
In Europe, we collect from municipalities local recycling points. We are required to recycle, some
fraction of the dumpsters. Sometimes there are vacuum cleaners, microwave ovens, all sorts of
products mixed in the dumpster. There is no sorting by brand or product - so there is no design
motivation.
HP has joined with Sony Europe, Braun, and Electrolux to form the European Recycling Platform.
The objective of the platform is to cooperate in evaluation, planning, and operation of WEEE
compliance activities n the most efficient way. The ERP recently selected a single contractor to
facilitate WEEE compliance. ERP supports market-based incentives the need for competition
and market-based structures that reward design for recycling."
With collection, in general, we need partners to share the cost and provide pick-up points in the
network. HP is committed to financing the processing, but collection costs should definitely be
shared.
Q: How much EoL product are you collecting?
Worldwide we are collecting approximately 120 million pounds of hardware and supplies per year.
The break down s about 50% Europe, 40% North America, and 10% Asia.
Q: What is your collection goal? products/month - pounds/yearOur collection volume is increasing each year and our goal s
1987-2007. HP started recycling hardware in 1987.
etc.
billion pounds cumulatively from
The recycling initiative is handled under the uPlanet Partners' program. Planet Partners was
established in 1991 to handle HP LaserJet print cartridges recycling. It expanded to include HP
inkjet print cartridges in 1997, and hardware was folded into the Planet Partners program in 1997 after
10 years.
Q: Are there incentives for customers to return products to you?
A mail-back envelope is provided with printer cartridges. Cartridge recycling in the US is about 4
times higher than n Europe - perhaps because of the ease and uniformity of the mailing service.
Q: Where are your processing facilities located?
Roseville, CA
Nashville, TN
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Q: How many employees will your process require at each facility?
There are no HP employees at the Nashville facility. The facility is operated by Noranda. We
employ 15 on-site HP employees at Roseville, who manage suppliers and oversee operations.
We are operating below capacity at both facilities.
Additional comments
The whole industry is immature, run by companies in other businesses such as waste
management. WEEE seems misguided, almost like trading one problem for another. Right now,
we see limited opportunities in dealing with WEEE.
The Office Depot program was pretty effective, and this sort of partnership preempts legislations.
The challenges we are facing now nclude 1) the CEO of Office Depot is no longer there, so the
partnership is in limbo, 2) we are not able to demonstrate that collection events bring store traffic.
There are regulator barriers that prevent the development of better and more competitive
services. We are also following what is happening in China pretty closely. China s trying to
create their own version of WEEE and RoHS. I think China should capitalize on their industrial
infrastructure and look to create a clean recycling industry.
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Discussion Notes
Participants: Julie Paquette, MIT; Thomas Marinelli, Philips
Date: May 10, 2005
Q: Does your company have a reverse supply chain?
As a company, Philips is responsible for following legislation. We have representatives in every
country to see what the position will be there. In response to the EU's WEEE Directive, we need
to build a take-back system in each country according to national requirements. The EU started
this directive ten years ago - in 2002 the legislation was final. It was given to all the 25 member
states to transpose into their national legislation. There are 2 articles that provide reference for
the directive, meaning the member states can have slight adjustments - stricter or not.
Generally, you can use existing companies to meet the requirements in each country. Philips
wants to participate in a collective system CRO (collective recycling organization) with
competitors. This is important, because Philips s not itself building a reverse supply chain, but
participating in a collective recycling system with partners.
Q: With EoL products, what are your reverse supply chain goals? (Choose all that apply.)
0 WEEE compliance: Yes, this is a primary concern.
E] better customer service
o increased customer loyalty
0 IP protection
0 cost savings: This is certainly a goal.
E] new revenue
E learning about product use
0 other types of learning: Yes, we hope to learn about how well we recycle and recover
materials, particularly precious metals.
We also consider what is important for the environment and finances.
Q: Where in your company is the EoL reverse supply chain being managed?
At the moment, we have medical, lighting, consumer electronics, appliances - since the impact is
broad, we have different teams working on it. For lighting, there is a central team working on this
since the impacts are the biggest. We have representatives in each country, directly or indirectly
working with the national governments and building our CRO. I have regular phone conferences
with all of them.
Q: How many people are involved in EoL reverse supply chain management?
In consumer electronics, no one is doing this full time. All together, there are between 20 and 30
people involved in this work. In lighting, there are more than 50.
Q: What are the management goals and indicators of success for the reverse supply chain?
We have been active, not only in knowing what government is doing, but also in working with
European Parliament to develop amendments through commenting, committee participation, etc.
This involvement on a country level is a big impact. So how do we know we are doing a good job
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL
PRESSURES
in this area? In certain countries we are more effective lobbyist than in others. We are certainly
very effective in monitoring.
We are VERY strongly supporting the visible fee. Historical waste can be paid by the visible fee.
The mindset in Europe is that the consumers are aware that we need to do more for the
environment - so the visible fee is a reminder that the consumer must return the product to a
collection point and companies will take it from there. Moreover, the money is needed. Industry
cannot afford it without the fee because products are extremely price sensitive. We need a visible
fee in consumer electronics especially, because our products are worth so little.
Another factor that is very important Is how future waste will be paid. One suggestion is to
establish a bank account to recover the costs that will be accrued in future years. However, we
don't want to put money actively into such account or pay for insurance. Collective systems
address this issue. If someone goes bankrupt, then the other collective participants have
committed to take responsibility for their market share. This eliminates the necessity to put
money aside or add insurance, although some may want insurance in addition.
Each country differs on this point. France wants insurance for one year - millions of Euro.
Although for participants in the collective system - 3 months is required. Germany requires a
small percentage as insurance, but only because the collective system is standing behind it.
Nonetheless, there are companies that are using an individual approach to the ERP as opposed
to the collective system. They are convinced that they can do it cheaper.
All that said, two primary management goals are: 1) to operate in a collective system, and 2) to
minimize investment. I'll add one more: to deliver the same set of data to each country. For this
we are pushing legislators for harmonization across the EU.
Q: What are key cost issues associated with your EoL reverse supply chain?
The cost depends of course on how well the system will be arranged in the future. Generally we
spend 0.5E/kg which includes 30% logistics, 20% processing. Administrative costs are and will
be very high.
Q: How will you collect product from the customer?
This varies by country. We generally use municipality facilities.
Q: How much EoL product are you collecting?
In the Netherlands, the legal requirement is 5 kg/inhabitant/year. We are well above that at about
6 kilos. In some countries such as Poland, you will never get 4 kilos back per inhabitant each
year because of geographic constraints or welfare. In Poland, this would require 95% collection.
In terms of processing capacity - countries such as Germany, France, and the Netherlands have
many facilities. Others like in the UK are building up. I'm sure that the Baltic States are going to
build facilities.
There are several entrepreneurs who are joining this industry and this is just the beginning. The
industry will build up as the Directive evolves. The way it's running in Belgium and the
Netherlands is great.
Philips does not link to one company or logistics provider - we go with what is available. The
company who is complying with all the rules and offers the best price gets our business. There is
a WEEE forum to help industry - there is support and visits to existing sites. I have no doubt we
will be successful in the end, but how quickly is the question.
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
Q: What are the major revenue sources for funding these efforts?
[ remanufactured product sales
[ part sales
[] material sales
[ fees
0 other company funds: Yes, the producer has to pay.
With consumer electronics, we are not seeing end value. The collection processes and recycling
will not be compensated. In fact, there are only a couple of products which have a positive end
value, including mobile phones. The fee on lamps is nearly half of the cost of the product.
So in the end, it will be company funds that cover these efforts. As a representative of Philips,
this may be difficult. But as a citizen, I'm asking for an environment that is good for my kids, and I
expect to make this contribution.
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PRESSURES
Discussion Notes
Participants: Julie Paquette, MIT; Bill Olson, Motorola
Date: April 25, 2005
Q: Does your company have a reverse supply chains?
Yes, we have processes n place for EoL products, unsold products, and product returns.
Depending on the type of return, we have preferred vendors who do recycling and various
mechanisms for getting them back. We use envelopes and collection bins, programs - such as
the race to recycle program where schools can earn $3 per phone up to $2100 per school, similar
programs in China the green van program, and in Europe we are leveraging the country takeback programs.
Q: With EoL products, what are your reverse supply chain goals?
0 WEEE compliance: This is our #1 concern as we have to comply and provide take-back
mechanisms.
0 Better customer service: I would rank this concern #2, certainly in terms of the warranty repair
service.
0 Increased customer loyalty: I consider this our #3 concern in these efforts.
[I IP protection: I feel that this goal is dubious at best even with PC take-back efforts.
rl Cost savings
a New revenue: This is not my primary goal.
0 Learning about product use: Yes, this is a concern certainly on products being returned, but
not with the EoL.
E Other types of learning
Q: Where in your company is the EoL reverse supply chain being managed?
We treat the EoL reverse supply chain as a business function. At Motorola, all the supply chain
functions from each business area were just organized into one function. Previously, each
business area was separate and each had unique reverse supply chain needs. For instance,
base station and cell phone reverse supply chain didn't involve the same people. Base stations
are almost like an appliance business - you may need to remove the station and this requires
more customer nteraction. This is very different than coordinating cell phone take-back.
By combining all the supply chain management functions, we are hoping to have consistent
management processes and goals across procurement.
Q: How many people are involved in EoL reverse supply chain management?
This is a hard question to answer - I don't know off-hand. We may partner with 3 recyclers in one
country and 2 in another. In Germany, we are paying the government's country systems and we
pay by our market share. Our efforts vary so much, I couldn't say how many people in Motorola
are working full time on reverse logistics.
Q: What are the management goals and indicators of success for the reverse supply chain?
Good question. You need to have a process in place. You have a cost associated with the
process and then you have the refurbishment and resale. Out-of-date products are one thing - a
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
judgment call has to be made. How you make that judgment is mainly an economic decision.
When you test a phone, you may be willing to invest a certain amount of money to refurbish.
Motorola has established guidelines for decision-making here.
So mainly, economic metrics are used.
Q: What are key cost issues associated with your EoL reverse supply chain?
Shipping is the big cost issue. Labor isn't all that much in the relative scheme of things.
Materials to repair and inventory are also a concern.
Shipping and providing financial incentives for collection from customers are big concerns. If you
are buying phones from people, paying for shipping, and repairing, those are all significant key
costs.
Q: How will you collect product from the customer?
Right now we are testing a pre-paid product return envelope in a couple of places through
Europe, ncluding Germany. It is hard to say whether or not this method is the cheapest or most
effective. Compare it to the Club Nokia approach. Nokia is using the club" for purchasing - they
are also leveraging it for take-back. I would say that the envelope approach is an effective one
that facilitates a more direct relationship with customer. We know it works - it may not be the only
way - but it works. The envelope approach also might seem expensive because of shipping, but
if you are building an organization to comply with Ipw, investors appreciate an approach that is
proven.
Also, we have warranty repair processes that we've been doing for years. If anything, we are
augmenting those processes with take-back efforts.
Q: Will you engage in partnerships with other organizations, such as retailers, municipalities, or
third-party service providers?
We partner with other organizations and we will continue to do so. This varies considerably by
country. In some cases, the government requires partnership. For instance, Motorola sells "x"
amount, the government calculates what we are responsible for, they provide the take back
system, and they expect Motorola to pay for it. In other countries, we may say that we are going
to contract with Company "x" and we pay them to handle take-back. In the countries where we
have envelopes - we handle take-back ourselves.
I equate this situation to a visit to the hospital. If you went into a hospital with several health
problems, you wpuld not have a cure all. Maybe Club Nokia works well for Nokia in some cases.
For us, we are doing a number of different initiatives in the market which vary according to
country restrictions.
Q: What types of products are you accepting?
We take it all. We take any manufacturer's phone.
Q: How much EoL product are you collecting?
This is a difficult question to answer, because for example, we have no idea how much is going
into the German system. I know specific customer information - but I can't release that because
it's sensitive.
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Q: What is your collection goal?
Goal for the school program in the US is 3 million pounds in 2005 - -but this is a drop in the
bucket compared to the entire cell phone market.
Through this program, Motorola is helping to develop relationships with future purchasers and we
could potentially refurbish and resell the products we are collecting. So there Is opportunity and
also a lot of goodwill in this program. There s some amount of money that is being lost through
this effort. But overall, this program s win-win.
In comparison, in England or Germany, they were buying phones fro 10 Euros a piece. I can't
believe they were making money on that.
Q: Where are your processing facilities located?
We have relationships with trusted vendors in several locations. We don't process the product
ourselves. We have trusted relationships, but no public partners "officially certified by Motorola," it
is all competitively bid annually.
My feeling is that processing is a competitive industry, and it's going to grow just by the nature
and magnitude of take-back that's going to be required. Processing is well developed n some
countries, like Japan. There, the system works and they make money because take-back and
processing is typically operated by the company itself like in white-wares. I think we'll see more there's tons of recyclers in Europe. Some people have their own processes, non-toxic etc. But
energy into a process makes it uneconomic, and disposing some inert material may be better
than processing. There's trade-offs between everything.
Ultimately, my view is that this industry will grow like waste industry. First small umom & pop"
shops will offer services, then it will consolidate into a larger industry, and finally someone will buy
it up and become the low cost provider in a particular service. It's just a matter of time.
When you collect 3 million phones, there's going to be a sorting process that occurs. You look for
products that can be resold or donated. Although, the bulk of it is not something that someone.is
going to buy again. Right now, warranty repair centers are centralized and handle much of the
take-back in the US. But at 100,000 million phones a year this approach would be phased out.
Q: What material streams are generated from your processes? What is the relative magnitude of
material streams?
When we refurbish and resell - we see revenue from that.
When we donate - we get tax credit from charity.
When we have e-waste disposed of - we get some material revenue.
There are revenue streams and material streams. A certain percentage of our plastic is reused.
At the end of the day, when something is broken, its scrap and frankly t is not worth much.
When you are at a level of collecting 100,000 million lbs/year, you're expected to be profitable
enough to afford the efforts. This s all about lifecycle product and price management - we'll
have to plan take-back efforts into the product cycle. These plans are already underway to an
extent, the problem comes in with a warranty repair problems - say we were using a Microsoft
operating system and we would have to reload - you can't really plan for those things. But for
EoL, absolutely you can plan.
In the future, I think that recovery fees will either be built into the price of the phone or added as a
fee. I don't think that the provisioning models that work for the automotive industry will work for
the cell phone industry, because our products don't last as long, the investment in components
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isn't as high, and sometimes it's cheaper to get a completely new product rather than repair an
older model. Remanufactured auto parts represent a huge industry - but a completely different
industry model.
But could this change? Perhaps.
Q: What is the Ideal outcome of all of these efforts in your opinion?
I think that deally, it's a system by which products have value at their end-of-life, sufficient
enough to provide the customer incentives for recycling and so that these older products serve as
a resource for companies in making new products.
Ideal would be a microprocessor that gets used for its Intended lifetime, rather than just once and
then ground up and smelted for a fraction of its value.
Where will we end up ultimately? I'm not sure. If you look at the computer industry, you see
more resale and remanufacture than consumer hand-held electronic units. But the more valuable
the product, the more such a model may apply. In China, consumers don't throw these products
away - they give them to others, adding millions to the network. They have much longer lives. If
we start looking at tangible assets as having longer lives - we could extend them by design.
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Discussion Notes
Participants: Julie Paquette, MIT; Representative from major printer manufacturer
Date: July 7, 2005
Q: Does your company have a reverse supply chain for any of the following?
Yes, we have a reverse supply chain in place to handle products returned on warranty, obsolete
and broken products, and end-of-life products returned from customers.
Our end-of-life program as described on the website was started 2 years ago at the request of our
parent company. Our parent company feels that environmental activities are very important and is
very active in this area. They have a 5-year environmental plan, a 7-year environmental plan, etc.
There are many components to these plans, and one of which is to provide this return service to
our customers.
We base our end-of-life offering on what our competitors do. It is a very expensive undertaking,
so we chose a "vanilla" approach. We take only our stuff (as opposed to our competitors.) We
charge customers $10 and offer them a $5 coupon for future purchase. Customers receive a prepaid mailer to send their equipment directly to our processor. This is a break-even, non-profit
approach - the $10 covers all of our expenses.
We currently receive a very small number of printers per month. We don't track demographics of
the people who return their products. We presume that they return the product to us because
there are no resources available in their communities. Sometimes, there are corporate or
institutional customers who return products to us. Perhaps it is easier for them to do this than find
another alternative.
Q: How much EoL product are you collecting?
Total processing is approximately 2 million pounds per year, consisting of equipment from
product returns, obsolete product and broken products.
Q: Where are your processing facilities located?
Currently we have 2 processors across the country. Our original partnership was with an
organization in the mid-west. We have also been working with a company here in Los Angeles
for the past year and a half. They have a process in place that has been recognized by many,
including the state of California and NGOS, to result in 100% materials recycling, with no land-fill,
no incineration, and no pollution. We started with them on ink cartridges, at 100,000 lbs per
month. We made the decision to move the bulk of waste out of a processing from the Midwest to
LA. The environmental benefit was so great --- the shipping and processing is about double in
cost - - We are transitioning from one to the another
Q: What are key cost issues associated with your reverse supply chain?
Transportation and processing fees.
Q: Where in your company is the reverse supply chain being managed?
Our reverse supply chain for broken and obsolete products is managed out of the main
distribution center in Indianapolis. They have a warehouse that manages inflow and outflow.
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There is limited space, so they know everything that goes n and out. They ship full trucks each
week with full containers. This takes a lot of planning.
Several of us are involved n monitoring different parts of these activities. The warranty group
monitors the defective product and sends a new product. So there's a lot of management of
reverse supply chain functionality in Indiana.
There are only a couple of us who look at environmental ssues - one in Indianapolis and my self.
I have a lot of contact with our parent company because I am involved n all the legislative ssues.
In the US, there are 9 states that have requirements relating to mercury labeling. The laws are
very complicated and nothing Is manufactured here, so we have to nterpret this legislation for
Japan. You need to label this product in this place, etc. - all those requirements need to be
communicated clearly.
We do have a very large global environmental policy division in Japan.
Q: What are the management goals and indicators of success for the reverse supply chain?
There are many goals. For one thing, we'd like to get fewer items back. Selling a product that is
more durable and easier to use s a goal.
Indicators of success? Right now, t's cost reduction. Our switch to the processor in Los Angeles
doubled the cost of processing. It s very difficult to make a case for this - it was a baffttlethat took
months and months.
Q: Are there incentives for customers to return products to you?
Our research shows that most people don't care about end-of-life offerings. We are a sales and
marketing organization - so to take on more voluntary programs wouldn't make sense. If
legislation required it, of course we would make efforts to provide incentives and offer services.
I struggle with this question a little bit, because people own their stuff. Is Epson in the position to
tell them what they should do with it? There s no clear advantage for us to increase that return
rate. As a business, why would we provide incentives for customers to do so? We've provided an
easy program - what more can we do?
Q: What are the major revenue sources for funding these efforts?
There are a couple of revenue sources. They're kind of small. If there was a return on our
activities in this area, we would have found it. For example, if you can get ink cartridges back,
you keep them out of the hands of the refillers. We don't have an ink cartridge collection program.
Also, by taking other company's products, you might persuade the customer to buy your product.
But I feel this benefit is negligible. Doing the right thing" doesn't seem to have much return. This
issue is a real challenge.
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Discussion Notes
Participants: Julie Paquette, MIT; Ken Hashman, Dell
Date: May 10, 2005
Q: Does your company have a reverse supply chain for any of the following?
We have processes n place for all three: EoL products, unsold products, and product returns.
Within EoL, we are most active in 2 areas. First, we have a process to supply our service parts.
Any part, however, that is we end up with at the end of that process, we send into a secondary
channel. If you search "Dell spare parts" on google, you will see all these parts in the secondary
market. If they're old - we might recycle them.
The more interesting area for us is our Asset Recovery Services, where we take back old units
from customers when deploying new systems. We've offered this service for a long time for end
of lease customers, but it's something that has really caught on in the last 2-3 years because of
increased concerns of data privacy, increased awareness of the environmental impact of
improper disposal, and liability concerns. We've focused on corporate clients - we see it as a
profit opportunity. Basically, when we sell to corporations, we go and take their computers, wipe
their hard-drives, give them certificates of assurance, and recycling certificates. We resell those
models that have value and give the client the money.
Asset Recovery has been most successful for us within education. For instance, with Chicago
public schools, we were able to offer a "clean the closet" service. If you're buying 100,000 Dell
computers, we'll come and take your 100,000 electronic devices that have been sitting in storage.
It's been good on the corporate side because in addition to Asset Recovery, we've done a lot of
community based "take-back events" with large customers.
Consumer side recovery is a bigger challenge. We've tried a number of incentive programs - free
recycling of your old computer when you buy a new, $10 recycling, $0.99 recycling - all with
limited success. Currently, when you buy a new printer, you get a free mailing label for the old
printer. We've seen better recovery rates on printers than PCs, but still very small.
So right now, Dell is pursuing a two-fold approach. First, we are hosting collection events. We've
done a number of events in Austin, Denver, Portland, Atlanta, and others. We'll do a recycling
event with a community with a bunch of trucks. We'll also partner with local communities in
conjunction with large corporations - like Ford and Dell host a big event together to generate
good will for both companies. Second, we are working on a partnership with Good Will to collect
electronic waste - we know this model works well with consumers.
In Austin, the Good Will is going to have a computer works location, where they de-manufacture
computers and send them out for recycling. The goal is to break even. It's a nice model. It
provides jobs and it solves the collection issue in part. In Austin, we lent our expertise to Good
Will in building partnerships, "these are the companies we use.....glass, cable, etc...." and we lent
them our name for PR.
San Francisco is our second test case. Good Will provides collection point, and we'll send a truck
and pick the equipment up. It's a very cost effective way for us to do this. Pre-printed mailers are
very expensive.
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Q: Where in your company is the EoL reverse supply chain being managed?
I sit in the deployment services group, which s a profit center. While we are not making money on
the consumer programs, we are making money on the commercial side.
It is our people who are removing the old computers to put into our reverse logistics network. We
partner with organizations that sort equipment and wipe data. They determine what good
equipment can be sold and help us sell for value. They either recycle the rest of the equipment
themselves or send it to a second tier recycler.
We manage both Tier 1 and Tier 2, and we contract a third party to audit the downstream waste.
We meet with them to ask specific questions like, "where do send the cable?" We manage all of
this because we don't want to expose ourselves to the liability and the public relations risks of an
irresponsible partner.
It's nteresting because recycling and recovery is definitely a cottage ndustry. Competition is with
small firms - local unsophisticated shops. But we've seen increased interest in venture capital to
go and buy out these small firms because they see the potential n this whole industry. In fact,
I've met with 3 VC firms who are thinking about it. Personally, I think there's money to be made if
you do it right - the key is a building a firm that can provide good value for new as well as recycle
the old.
Q: How much EoL product are you collecting?
We publish an environmental report that describes all our collection volumes. It is available
online.
Q: How does your collection system differ in Europe?
Europe is nteresting - I can refer you to the person who runs the recovery business in Europe.
Customers still need to get their assets to a collection point, so they still want the services that we
are offering here. In some ways, I think the new legislation in Europe helps us because it builds
awareness. There are different legislative models emerging everywhere, which we track.
Personally, I don't think the California advanced recovery fee will work, because it's still up to the
consumer or the end user to take their computer back to collection points. It's hard to see how
they'll do that...which is really where our Good Will partnerships may play a role.
Q: Where are your processing facilities located?
We have one central facility that everything from around the country comes back to and then a
handful of processing partners in a few states. We are looking to migrate from the one central
point to regional - maybe 3 locations altogether. Any more than three would be too hard to
manage, particularly with the data destruction process. We'd rather err on the side of control.
Right now, the one facility is in Dallas - we may move to one in Ohio and one on the west coast.
Q: What are the major revenue sources for funding these efforts?
The residual value you receive from the second tier recyclers is very small. So our goal really is
to break even. The national Goodwill model should get us there, and we're playing with a lot of
models right now to see what works.
The real issue is driving customer participation. I don't think legislation is necessarily the answer
- you need the private sector to solve the problem. However, if government were to get more
involved in the US, I think curbside collection would be the easiest answer. Recycling on the curb
- you could see that evolve successfully like existing recycling and trash collection.
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PRESSURES
Discussion Notes
Participants: Julie Paquette, MIT; Representative from major television manufacturing company that
is undergoing transition.
Date: July 19th, 2005
Q: How do your ownerships changes affect your interest in electronics end-of-life?
Prior to the sale of our television business, we were very active in NEPSI and the Electronic
Manufacturer's Coalition for Responsible Recycling. We are strong advocates of the Advanced
Recycling Fee (ARF) as the best approach to financing management of end-of-life electronics at
the state and national levels.
I've sent you a number of materials that outline the reasons for our support of the ARF approach.
In short, we believe it will be the least expensive overall, easiest to implement, and most
appropriate to transfer from a state-level to a national system.
Since the sale, we are relatively less active in this area of advocacy. However, we still support
the ARF approach and remain active in other areas of environmental activity.
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PRESSURES
Discussion Notes
Participants: Julie Paquette, MIT; Klaus Hieronymi, HP
Date: August 2, 2005
The European Recycling Plafform (ERP) is a collective system, in that it represents many
manufacturers coming together to fulfill their obligation on take-back jointly. ERP is different,
however, than collective systems where all manufacturers are forced to work together. For
instance, in Belgium there is no choice n operation. Manufacturers are forced to use a single
system. All the European member states are different in this respect. Austria is a good example
for us to discuss because it is a small country with very well-developed legislation. Many
countries have delayed implementation until the first quarter of 2006, but Austria will be
implementing on August 13"'.
Q: Why did HP co-found this initiative?
This decision was based primarily on our experience with packaging laws. In Germany when
packaging laws were established n 1991, there were only two compliance solutions.
Manufacturers could take back their own packaging or they could join a collective system called
the Green Dot. In 1995, I began managing environmental programs in Germany. I realized that a
large percentage of my budget was being spent on the Green Dot system. I tried to meet with
them and it took 9 months for a meeting. After this point, the government tried to assist the
situation by setting up 6 competitors to the Green Dot system. We were paying $350E/ton then,
but today in 2005, it is $70 per ton. This competition drives down cost and increases service.
I should mention that we are still a member of Green Dot for a small percentage of our work, but
we do not wait 9 months for a meeting now.
To draw comparisons, the cost of WEEE will be significantly higher than packaging compliance.
We don't know how much more expensive exactly, because it is still under development - - but
we assume 10 times higher. This prompts two primary concerns. We want a choice in systems,
and we do not want to comply with 25 separate national systems. Choice and competition drives
down costs. Uniformity drives down costs. With separate systems, we would need 25 highlyeducated people protecting our interests in each country.
Hewlett Packard's vision for 2012 is that there will be four or five European Consortium systems
competing in all 25 countries. Promoting such a competitive system has been our strategic
approach for the past two years.
Q: Why did these five particular companies come together?
These five companies all support the principle of individual producer responsibility. Electrolux, for
instance, ran a campaign a couple of years ago showing a neighbor's trash in a yard, writing why
should I care about my neighbors waste?" It is agreement that you will only achieve better
product if you make the individual manufacturer responsible. The time for socialist/communal
systems has passed.
When we began looking to buy take-back services, we didn't find service providers with a
'European" view. Many of the industries in Europe are not organized on a European-wide basis,
rather, they are still nationalistic. HP is very European and our main decisions are made on a
European level. The cost of take-back is managed on a European level, in fact. I own the budget
for the entire continent. I can optimize on a pan-European basis. I think HP has a very innovative'
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THE SUPPLY CHAIN RESPONSE TO ENVIRONMENTAL PRESSURES
approach in centralizing as much as we can. We couldn't find service providers - we had to
create the market. So we started the ERP in November 2004. We needed external expertise so
solicited a study from Accenture, which projected a 30% savings. We should keep in mind that for
HP this is just an interim solution. Hopefully, eventually - ERP will be independent. We would
like to see 3-5 systems competing for our business. We will consider competition from other
consortia to be one of the first signs of success.
In Austria, we have seen that 4 consortia have applied for a permit. Why is this good? Because
every manufacturer will have this choice in Austria. There are 5 waste categories. ERP is not
participating in fluorescent lamps because none of our founding members have an obligation for
this. We are offering all other services.
In addition, we have seen prices in the last two weeks in Austria. Prices from ERP are the lowest
in the market because we do not have to establish a specific overhead for Austria. We have
European overhead. We learned that European overhead equates to the same as overhead for
two or three individual countries.
Across Europe, we see that systems in Spain and Ireland are offering prices that are much lower
than those from countries with a single monopolistic system. Sweden, Norway, Belgium, and
Switzerland all went for a local monopolistic solution.
ERP uses competition internally and externally. We use two general contractors. CCR is a
waste management company based in Germany, and they will be handling take-back in Italy,
Austria, Germany, and Poland. Geodis is a large French logistics company with about 45,000
employees who will be handling Ireland, UK, Portugal, and Spain. We chose these two
contractors out of 15-16 applicants. We chose two so that one could cover the other if necessary.
Q: How will the actual take-back happen in most countries?
Europe is not Europe. Europe is a bunch of countries that do whatever they like and do not care
about their neighbors. Each country is different. In Austria, they collect waste in their
municipalities in five separate categories: lamps, televisions and monitors, refrigerators, above 50
cm, and below 50 cm. In Germany, waste is separated into cooling, other large domestic
appliances, consumer electronics including television and information technology, small
household goods, and power tools. In UK, there is no separation. This difference in procedure is
one of the biggest challenges for all companies.
Q: What about insurance?
This is another area where countries do not follow the WEEE Directive explicitly. WEEE requires
that you assume responsibility for the products that you put onto the market after August 2005:
All of industry is jointly responsible for products put out before that date. This means that HP and
other manufacturers are responsible for brands from companies that are no longer in existence.
These are called orphaned products. Moving forward, the legislation requires all companies to
put a "guarantee" which insures that if you leave the market, there are funds available for
recycling. One way to cover that guarantee is to cooperate with a bank or insurance company.
To make a long story short - - only Germany is following this part of the directive.
In Germany, they differentiate between financial and operational responsibilities. ERP members
will pay either based on market share or only for their product. At the end of the day they need
someone who goes out and picks up their products for recycling. HP will register ERP with the
government body. If HP is selling 25% of the market, then the agency will know that every fourth
container will go to ERP. In other countries around the world, like Korea, they organize
geographically. These volumes, while varying, are very predictable. There are some peaks
seasonally.
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Q: How do you feel enforcement will work on this?
Enforcement is critical, and we would like governments to try hard to do this. But we are not sure
they will do so. They feel that Industry should regulate itself. Different countries have different
approaches. All countries will require companies to register themselves with a number which you
will put on every invoice. This will help. The other way is to publish the brand names
participating and reward companies that have done well. Relying on the government may not be
the right strategy. HP and others actually end up paying for companies that are cheating the
system.
Big names will not purposefully work around the system because there is too much to risk in a
brand name. But small importers will try to avoid the system for $500. You shouldn't do that in
Denmark, because the penalties include imprisonment of the CEO for two years.
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Discussion Notes
Participants: Julie Paquette, MIT; Representative from major cellular phone manufacturer
Date: August 3, 2005
Q: Does your company have reverse supply chains for product retumrns,obsolete product, and
end-of-life?
Yes, we have these three product return mechanisms. Warrantees are handled through our
customer care group. Obsolete and EoL are handled differently, and this really depends on the
customer. It is also worth noting that Nokia's programs are area specific. What we do in APEC
and China are completely different than what happens elsewhere. I manage and will be speaking
about the American Time Zone.
Q: Where in your company is the EoL reverse supply chain being managed?
I handle EoL for the ATZ, and we have several material flows. With regard to EoL phones from
consumers, we have a few different approaches. We have our own website which provides return
directions and free mailing. These phones come directly to Forth Worth. We are also supporting
the E-bay RETHINK initiative, which is an information clearinghouse with many manufacturers
partnering.
We do not separate these EoL phones. We typically receive products that are 24 months or
older, because anything else would be sent to warranty repair. The recycling facility may make
some determinations about the phones: Can anything else be used again? Can parts be used in
other applications? However, we do segregate into three groups - handsets, accessories, and
batteries. Lithium-ion batteries are sent straight to cobalt processors. Cobalt is recovered from
the batteries and sent back to our manufacturers. The accessories themselves are sent to
copper smelters. Main circuit boards go to precious metal recovery. LEDs also go to precious
metal for gold and palladium.
Q: How will you collect product from the customer?
We are hoping to develop a partnership with the US Postal Service to provide collection bins at
the post office. There are 38,000 post offices in the US. Collection there would solve the "first
mile" problem. If people bring them to the post office, we can take back larger volumes at one
time, rather than one at a time. We are also investigating including free mailers with new phones.
We have a variety of collection initiatives right now. We operate 300 service centers with
collection bins. We collect phones at all of our factories and offices. We're also launching
"experience centers" in malls and shopping centers which show Nokia products. We'll place
collection bins there. We sponsor various functions during the year, including the Sugar Bowl. So
we set up demonstrations of products and collect phones.
These collection points are helpful, but they don't reach out as much as the internet or post office.
On our own website, we have 11 million subscribers to our newsletter and we send out
communication all the time. But it is hard to provide incentives for customers to return phones. I
read in a recent EPA report that 78% of cell phones are sitting around people's homes. When
consumers choose to upgrade their phones, it is very easy to just throw your old phone in a
drawer. They are not intrusive.
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There are several alliances in the US to address this. A Senate panel held a hearing about it last
week.
Q: How much EoL product are you collecting?
The only way that I can really answer that is we have 5 main flows.
1. In the ATZ, we have 3 production factories located in Brazil, Texas, and Mexico. They produce
paper products, plastics, cardboard, and electronics.
2. We have flow from our repair centers. This may include spare parts, plastic frames, or LEDs
for instance.
3. We have flow from our R&D facilities. This material is very critical for EoL.
4. We have flow from our take-back, which includes phones from consumers and also networking equipment which is an entirely different challenge.
5. Office products - we have computers and monitors etc, like everyone else.
I think centrally managing all of these flows makes a lot of sense, because there is an expertise
here. Looking at this holistically gives us a pretty good feel for what is happening across the
board. We realize early on that if we were going to take advantage of the best EoL options - we
really needed volume. By combining all of these material flows, we get better volume.
Cell phones operate through network bay stations which are located about every 10 miles. With
the merger of Cingular and AT&T wireless, there were two network bay stations located in many
areas when you only need one. Right now, we are responsible for removing unnecessary
networking equipment. From a logistics standpoint, this is a huge challenge. We are averaging
100,000 lbs per day.
With phone take-back, typically we see about 300-500 phones per month. Since the partnership
with E-bay began, we see about 3,000 phones per month. We anticipate that this number will
increase when we tie-in purchase of a new product with return of old product.
Do we have goals? No. We just want as many phones back as we can get.
Another key challenge in all of this is that we "compete" with the retailers for take-back. The
retailers and service providers have 2,700 locations between them where people go to buy new
phones and naturally, return their old phones. Retailers are just a lot more visible.
Q: Can you tell me a bit about your professional background?
I worked for a precious metal refining company for 18 years. I set up collection facilities
throughout the world, handling reverse logistics and segregation.
I think there is a lot of room for improvement in this industry. Right now, there's incredible growth,
and companies that research this will find some companies with very impressive processing
capabilities. The really good ones can do a lot - they can take products from mainframe
computers all the way down to phones, put them into shredders that separate all the various
components into almost usable material.
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PRESSURES
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